Question

10. Problem 5.26 Click here to read the eBook: Present Values PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $300. The loan will have a 11% APR based on end-of-month payments. a. What is the most expensive car you can afford if you finance it for 48 months? Do not round intermediate calculations. Round your answer to the nearest cent. b. What is the most expensive car you can afford if you finance it for 60 months? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer (a):

Down Payment made = $ 4,000/-

Maximum Monthly Instalment (EMI) = $ 300 per month

Rate of Interest = 11% per annum or 11/12 % per month i.e. 0.916667%

No. Instalment = 48

In the given question we have to calculate the Present Value of the Loan the basis of these information which we can do through Excel (financial function) PV

Function Arguments ? X * Rate 11%/12 Nper 48 Pmt 300 Evo Type o = 0.009166667 = 48 = 300 = 0 *

Rate of Interest = 11% per annum or 11/12 % per month i.e. 0.916667% (consider as Rate in Excel)

No. Instalment = 48 (consider as Nper in Excel)

Maximum Monthly Instalment (EMI) = $ 300 per month (consider as Pmt in Excel)

Fv here refer as future value since this is a loan hence it would be zero at the end.

Type refer as payment is done at the end of the month (given in the question)

Present Value (PV) =PV(11%/12,48,300,0,0)

On the basis of the formula result will be $ 11607.43

Maximum Value of the Car he can afford:

                                                                                = Down Payment + PV of the Loan

                                                                                = $ 4,000 + $ 11,607.43

                                                                                =$ 15,607.43 or $ 15607

Answer (b):

Down Payment made = $ 4,000/-

Maximum Monthly Instalment (EMI) = $ 300 per month

Rate of Interest = 11% per annum or 11/12 % per month i.e. 0.916667%

No. Instalment = 60

In the given question we have to calculate the Present Value of the Loan the basis of these information which we can do through Excel (financial function) PV

= 0.009166667 = 60 Rate 11%/12 Nper 60 Pmt 300 Fv 0 Type o = 300 = 0 = 0 * = -13797.91015

Rate of Interest = 11% per annum or 11/12 % per month i.e. 0.916667% (consider as Rate in Excel)

No. Instalment = 60 (consider as Nper in Excel)

Maximum Monthly Instalment (EMI) = $ 300 per month (consider as Pmt in Excel)

Fv here refer as furture value since this is a loan hence it would be zero at the end.

Type refer as payment is done at the end of the month (given in the question)

Present Value (PV) =PV(11%/12,60,300,0,0)

On the basis of the formula result will be $ 13797.91

Maximum Value of the Car he can afford:

                                                                                = Down Payment + PV of the Loan

                                                                                = $ 4,000 + $ 13,797.91

                                                                                =$ 17,797.91 or $ 17,798