Question

Mary wants to buy a car but is unsure how much of she can afford. The maximum monthly payment she can afford is $780. Her bank's interest rate is 14% annualy if she pays off loan over 5 years.

what is the maximum amount she can afford to borrow?

- impossible to calculate with given data

- she can afford $53,325.05

-she can afford $46,800.03

-she can afford $33,522.07

(show all excel work)

Answer 1

Option 4 is the correct answer, Let us undestand it further,

Given,

Interest rate = 14%

Monthly Payment = $780

No of periods(In Months) = 60

Compounding Period per year = 12 (As payments are made monthly in a year hence 12)

We can use PV function from excel to calculate the max amount she can afford.

PV Excel function returns the present value of investment the total amount that a series of future payments worth now,

Max Loan Amount= PV( Interest Rate/Compounding per year, Period, Monthly Payment)

Max Loan Amount= PV(14%/12,60,-780)

Max Loan Amount= $33522.07

Please take a note, while using excel one can put figures in difference cell and use the PV function in excel to calculate the maximum amount.