Question

To purchase a new truck, you borrow $19000. The bank offers an interest rate of 5% compounded monthly. If you take a five-year loan and you will be making monthly payments, what is the total amount htat must be paid back?

a. What is the number of time periods (n) you should use in solving this problem?

b. What rate of interst (i), per period of time, should be used in solving this problem?

c. Is the present single amount oif money (P) known? Y or n

d. Which time value factor should beused to solve this problem?

e. What amount must be paid back each month?

f.. What is the total amount that will be paid back over the life of loan?

g. What is the total amount of interest you will pay?

h. Draw a cash flow diagram

Answer 1

Compound interest formula

                                     A = P(1+R/N) ^ (NT)

Where:

A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for

THE AMOUNT THAT MUST BE PAID BACK

             19000(1+0.05/12) ^ (5(10))   = 23390.72291

A.           N= 12

B             I= 5% OR 0.05

C              YES P IS KNOWN P = $19000

D             SINCE ITS A COMPUND INTEREST T= 5 YRS WHICH IS A LOAN TERM

E              AMOUNT THAT MUST BE PAID BACK EACH MONTH IS = 23390.72291/12/5 = $389.844

F             TOTAL AMOUNT THAT WILL BE PAID BACK OVER THE LIFE OF LOAN IS $23390.72291 ( explained )

G              TOTAL AMOUNT OF INTEREST = AMOUNT - PRICIPAL

                    23390.72291- 19000= 4390.72291