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4 September, 02:58

Todd can afford to pay $375 per month for the next 7 years in order to purchase a new car. The interest rate is 6.5 percent compounded monthly. What is the most he can afford to pay for a new car today

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  1. 4 September, 05:31
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    The most he can afford to pay = $25,260.07

    Explanation:

    The most he can afford to pay is the present value of the $375 per month discounted at the interest rate of return of 6.5% p. a

    PV = A * (1 - (1+r) ^ (-n)) / r

    PV = ?, A - 375, r - 6.5/12 = 0.541% n = 12*7 = 84

    PV = 375 * (1 - (1.00541) ^ (-84)) / 0.00541 = 25260.071

    The most he can afford to pay = $25,260.07

    Note: the monthly interest rate needed to be computed by dividing 6.5% by 12 and the number of months in 7 years is 7 * 12 = 84
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