Question

In order to buy a new car, you finance $32,000 with no down payment for a term of five years at an APR of 6%. After you have the car for one year, you are in an accident. No one is injured, but the car is totaled. The insurance company says that before the accident, the value of the car had decreased by 25% over the time you owned it, and the company pays you that depreciated amount after subtracting your $500 deductible. Suggestion: Use the following formula for the equity built up after k monthly payments. Equity = Amount borrowed ((1 + r)k – 1) ((1 + r)* – 1) Can you pay off the loan using the insurance payment, or do you still need to make payments on a car you no longer have? 0 Yes, you can pay off the loan using the insurance payment. No, you cannot pay off the loan using the insurance payment. If you still need to make payments, how much do you still owe? (Subtract the payment from the insurance company. Round your answer to the nearest cent. If you no longer need to make payments enter zero.) eBook

Answer 1

Insurance company pays 32000*(1-25%)-500=23500

Loan oustanding=32000*(1+6%/12)^12-32000*(6%/12)/(1-1/(1+6%/12)^(12*5))*1/(6%/12)*((1+6%/12)^12-1)=26342.29865

No you cannot pay off the loan

Amount owed=26342.29865-23500=2842.29865