You have just purchased a new car! You made a down payment of $5,000 and financed the balance. According to the purchase agreement, you must pay $600/month for four years, beginning one month from today. The credit agreement is based on an annual interest rate of 12%. What was the cost of the car? Select one:

a. 6,822

b. 22,784

c. 27,784

d. 28,800

e. None of the above

The correct answer is C.

Explanation:

Giving the following information:

The down payment of $5,000 and financed the balance. According to the purchase agreement, you must pay $600/month for four years, beginning one month from today. The credit agreement is based on an annual interest rate of 12%.

First, we need to calculate the final value of the monthly payment.

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit = 600

i = 0.12/12 = 0.01

n = 12*4 = 48

FV = {600*[ (1.01^48) - 1]}/0.01 = 36,733.56

Now, we calculate the present value:

PV = FV / (1+i) ^n = 36,733.56 / (1.01^48) = 22,784

Total cost = 22,784 + 5,000 = $27,784