Question

In: Finance

Assume that you have a balance of $3200 on your MasterCard and that you make no...

Assume that you have a balance of $3200 on your MasterCard and that you make no more charges. Assume that MasterCard charges 12% APR and that each month you make only the minimum payment of 6% of the balance.

What will the balance be after 24 months? (Round your answer to the nearest cent.)

Solutions

Expert Solution

Given details in the question,

APR, or the interest rate yearly is 12% p.a.
Hence, the monthly rate is 12%/12, or r = 1% every month
The balance outsatnding at the start of the term is $3200.

Payment of 6% of the balance amount is made only every month.
Hence, to solve and find out the final value outstanding after 24 months, we need to apply the applicable monthly interest rate on the outstanding amount and add the Interest Amount to the outstanding value, pay off 6% off of it, and then use the same remaining and oustanding balance for computing the balance for next month. The calculation for the same is shown in the form of a table below.

TimeLine Outstanding Amount (Principal at Beginning of Month)

Total Amount due

(Principal * (1+r))

Net Outstanding Balance for next month (Total Amount Due - 6% Payment Made) or (0.94* Total Amount Due)
Month 1 3200 3232 3038.08
Month 2 3038.08 3068.4608 2884.353152
Month 3 2884.353152 2913.196684 2738.404883
Month 4 2738.404883 2765.788931 2599.841595
Month 5 2599.841595 2625.840011 2468.289611
Month 6 2468.289611 2492.972507 2343.394156
Month 7 2343.394156 2366.828098 2224.818412
Month 8 2224.818412 2247.066596 2112.2426
Month 9 2112.2426 2133.365026 2005.363125
Month 10 2005.363125 2025.416756 1903.891751
Month 11 1903.891751 1922.930668 1807.554828
Month 12 1807.554828 1825.630376 1716.092554
Month 13 1716.092554 1733.253479 1629.258271
Month 14 1629.258271 1645.550853 1546.817802
Month 15 1546.817802 1562.28598 1468.548821
Month 16 1468.548821 1483.23431 1394.240251
Month 17 1394.240251 1408.182654 1323.691694
Month 18 1323.691694 1336.928611 1256.712895
Month 19 1256.712895 1269.280024 1193.123222
Month 20 1193.123222 1205.054454 1132.751187
Month 21 1132.751187 1144.078699 1075.433977
Month 22 1075.433977 1086.188317 1021.017018
Month 23 1021.017018 1031.227188 969.3535567
Month 24 969.3535567 979.0470922 920.3042667

Hence, we can see from the table that at the end of 24 months, the net balance left to be paid rounded off to the nearest cent is $920.30


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