Question

Jake wants to buy Larry's Kubota L5600. Larry bought it two and a half years ago and paid $89,500; it is a little dented but Kubota tractors hold their value. The Kubota dealer gave Larry a 5 year loan at 3.0% with monthly payments. To pay off the loan, what is the least amount Larry should accept from Jake to sell the tractor?

		$51,591.39
		$46,425.31
		$40,544.76
		$30,934.35

Answer 1

Answer: $46,425.31

First calculate monthly payment:

Using financial calculator BA II Plus - Input details:	#
I/Y = Rate/Frequency =	0.250000
FV = Future value =	$0
N = Total payment term x Frequency =	60
PV = Present value of Loan =	-$89,500.00
CPT > PMT = Payment =	$1,608.20
Alternate formula-based method:
PMT = Payment = |PV| x R% x (1+R%)^N / ((1+R%)^N - 1) =	1,608.20

Now, calculate the Outstanding balance today which will be required to retire the loan:

Using financial calculator BA II Plus - Input details:	#
I/Y = Rate/Frequency =	0.250000
PMT =	$1,608.20
N = Total payment term x Frequency =	30
PV = Present value of Loan =	-$89,500.00
CPT > FV = Outstanding balance today =	$46,425.25

FV = Outstanding Balance = (|PV|*(1+R/12)^N)-(PMT*((1+R/12)^N-1)/(R/12))

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Closest option (ignoring the rounding off) or Correct option is > $46,425.31