Question

The purchase of a car requires a $25,000 loan to be repaid in monthly installments for four years at 12% interest compounded monthly. If the general inflation rate is 6% compounded monthly, find the actual- and constant-dollar value of the 20th payment.

show all steps please

Answer 1

Given:

P = $25,000, i = 1% per month, f‾ = 0.5% per month

20th payment in actual dollars:

A₂₀ = $25,000(A/P, 1%, 48) = $658.35

20th payment in constant dollars:

A’₂₀= $658.35 (P/F, 0.5%, 20) = $595.854