Question

Stereo Inc. sells a stereo system for $600 down and monthly payments of $80 for the next 5 years. If the interest rate is 1.5% per month, find:

a) The cost of the stereo.

Answer = $

b) The total amount of interest paid.

Answer = $

Answer 1

We first find the present value of the monthly payments

Using a financial calculator

FV =0

PMT = 80

N = 60 (5 years* 12 payments per year = 60 periods)

I/Y = 1.5

cpt PV, we get PV = 3150.42

a)

Cost of the stereo = PV of monthly payments + Down payment

Cost of the stereo = 3150.42+600

Cost of the stereo = $3750.42

b)

Total interest paid = Total payments - Cost of the stereo

Total interest paid = (600+80*5*12) - 3750.42

Total interest paid = $1649.58