Jah-Malya can afford a car payment of $400 per month for 48 months at an annual rate of 8.25 percent interest.Which of the following is closest to the amount she will be able to borrow for a new car?
A)$16,306
B)$4,741
C)$22,656
D)$12,997

Question

Quizplus · Accepted Answer

The amount Jah-Malya can borrow is calculated using the formula for the present value of an annuity because the car payment is an annuity (a series of equal payments at regular intervals). The formula is P = PMT [1 - (1 + r)^-n] / r, where P is the present value (amount she can borrow), PMT is the payment amount ($400), r is the monthly interest rate (annual rate of 8.25% divided by 12 months = 0.6875%), and n is the total number of payments (48 months). Plugging in the values, we find that the amount closest to what she can borrow is approximately $16,306.

Jah-Malya Can Afford a Car Payment of $400 Per Month