Todd is able to pay $220 a month for five years for a car. If the interest rate is 3.9 percent, how much can Todd afford to borrow to buy a car?

a $5,072.93

b. $8,499.13

c. $11,975.12

d. $12,211.34

e. $982.16

Expert Solution

The option (c) is right option.

Explanation:

Formula to be used = PV of ordinary annuity
PV = PMT*[(1/r)*(1-(1/(1+r)^n))]
PMT 220, rate = 3.9%, years = 5
Monthly rate = r = 3.9% /12

= 0.325%,

n = 5 x 12 = 60 months
PV = 220*[(1/0.00325)*(1-(1/(1+0.00325)^60))]
PV = 220*54.4323473 = 11975.12
PV = 11975.12

Hence, (c) is right option.

Nabeel answered 1 year ago

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