An engineering student bought a car at a local used car lot. Including tax and i
ID: 1248489 • Letter: A
Question
An engineering student bought a car at a local used car lot. Including tax and insurance, the total price was 3000. He is to pay for the car in 12 equal monthly payments, beginning with the first payment immediately (in other words, the first payment was the down payment). Normal interest on the loan is 12%, compounded monthly. After six payments (the down payment plus five additional payments), he decides to sell the car. A buyer agrees to to pay a cash amount to pay off the loan in full at the time the next payment is due and also pay the engineering student a 1000. If there are no penalty charges for this early payment of the loan, how much will the car cost the new buyer?Explanation / Answer
PV = a*((1+k)^n -1)/(k*(1+k)^n where, PV = 3000 k = 12%/12 =1% =0.01 n = 11 as first payment is at zero date. so, 3000 = a*(1.01^11 -1)/(0.01*1.01^11) => a = 289.36 PV (at the end of 6th payment) = 289.36*(1.01^5 -1)/(0.01*1.01^5 = 1404.39 PV due = 3000 - 1404.39 =1595.61 FV of this at the end of 6th month when next payment is due = 1595.61*1.01^6 = 1693.77 so cost to the buyer = 1693.77 + 1000 = 2693.77 (units of cash) (ANSWER)