Question

A smooth used-car salesman is offering you a great deal on a “preowned” car.  He says, “For only five annual end-of-the year payments of $2,180, the beautiful 2016 Honda Civic can be yours.”  If you can borrow money a 5.47%, what is the price of the car?  If you are to make the payment at the beginning of the year, what is the price of the car?

Answer 1

Ans:- In this question, we need to calculate the price of the car that means the present value of an annuity. we will use the PV function of excel to find the present value.

For PV of an ordinary annuity, Rate=5.47%, Nper=5, Pmt=-$2,180, FV=0, TYPE=0

For PV of annuity due, Rate=5.47%, Nper=5, Pmt=-$2,180, FV=0, TYPE=1

Note:- In excel we Put TYPE=0 when payment or withdrawal is done at the end of the period (ordinary annuity), and TYPE=1, when it is done at the beginning of the period (annuity due).

Therefore, the price of the car if payment is made at the end of the period is $9,316.88 and if the payment is made at the beginning of the period, then the price would be $9,826.52.

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