As a young graduate, you have plans on buying your dream car in three years. You believe the car will cost $50,000. You have two sources of money to reach your goal of $50,000. First, you will save money for the next three years in a money market fund that will return 8% annually. You plan on making $5,000 annual payments to this fund. You will make yearly investments at the BEGINNING of the year. The second source of money will be a car loan that you will take out on the day you buy the car. You anticipate the car dealer to offer you a 6% APR loan with monthly compounding for a term of 60 months. To buy your dream car, what monthly car payment will you anticipate?

Question

Quizplus · Accepted Answer

VALUE OF CAR = FV of SAVINGS + PV of LOAN
SAVINGS: Set calculator to begin
n = 3, r = 8%, PV = $0, PMT = $5,000, FV = $17,530.56
Car loan = $50,000 - $17,530.56 = $32,469.44
LOAN:
n= 60, r=.5%, PV= $32,469.44, FV = $0, PMT = $627.73

As a Young Graduate, You Have Plans on Buying Your