Question

1. A newly divorced father of two, looking to improve his image wants to purchase a Mercedes-Benz in order to impress his young and foxy girlfriend. The car costs $17,999 and the car yard is willing to offer financing. The terms of the deal include a $2000 deposit (which the client has) with the remainder of the balance being repaid in equal monthly installments over the next three years. The car dealer charges 1.25 percent interest rate per month on the balance of the outstanding loan.

Required: Calculate the size of each monthly payment and then prepare a loan amortization schedule to show that as time passes the amount paid in interest by your client is reduced.

Answer 1

=> It is given that cost of car is $ 17,999 and $ 2,000 deposited initially

* Therefore the loan amount = 17,999 - 2,000 = $ 15,999

=> Now we have the total loan amount(15,999) , monthly interest rate(1.25%) and Number of payments(12*3=36)

*To find the monthly payment, use the PMT function in excel

=> Here we can clearly see that as time passes the amount paid in interest is reduced.

=> The formula used in excel are as follows: