Question

You currently have two loans outstanding: a car loan and a student loan. The car loan requires that you pay $329 per month, starting next month for 28 more months. Your student loan is requires that you pay $145 per month, starting next month for the next 119 months.

A debt consolidation company gives you the following offer: It will pay off the balances of

your two loans today and then charge you $487 per month for the next 41 months, starting

next month. If your investments earn 4.58% APR, compounded monthly, how much would

you save or lose by taking the debt consolidation company’s offer?

If you lose, state your answer with a negative sign (e.g., -25,126)

Answer 1

car loan present value = pv(r,n,pmt,fv,beginning of month) = pv(4.58%, 28, 329,0,1) =$ - 5368.44

student loan present value = pv(r,n,pmt,fv,beginning of month) = pv(4.58%,119,145,0,1) = $-3294.89

PV of total outflow of both loan will be $ -8663.33

Consolidated loan present value = pv(r,n,pmt,fv,beginning of month) = pv(4.58%,41,487,0,1) = $-9347.15

Hence continuing both car &student loan is advisable.

Note - Problem has been solved in excel.