Question

You want to buy a used Dodge Dart in 2 years when you graduate. The price of the car now is $5000, but you have read that the price will drop by 5% per year during the next 2 years. If you will be able to get a 4 year loan at 16% annual interest with monthly payments, how much will the monthly payments be when you purchase the car 2 years from now?

Answer 1

The amount is computed as follows:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

Present value is computed as follows:

= $ 5,000 x (1 - 0.05) x (1 - 0.05)

= $ 4,512.5

r will be as follows:

= 16% / 12

= 1.33333333%

n is as follows:

= 4 x 12

= 48

So, the monthly payment will be as follows:

$ 4,512.5 = Monthly payment x [ [ (1 - 1 / (1 + 0.013333333)⁴⁸ ) / 0.0133333333 ]

$ 4,512.5 = Monthly payment x 35.28546573

Monthly payment = $ 4,512.5 / 35.28546573

Monthly payment = $ 127.89

Feel free to ask in case of any query relating to this question