Question 1198910: Suppose you can afford to pay $ 325 a month for 9 years towards a new car with no down payment. If the current interest rates are 4.75%, how expensive a car can you afford?
Car sticker price =
Answer by ikleyn(52781)   (Show Source):
You can put this solution on YOUR website! .
Suppose you can afford to pay $ 325 a month for 9 years towards a new car
with no down payment. If the current interest rates are 4.75%, how expensive
a car can you afford?
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It is a classic Ordinary Annuity saving plan. The general formula is
FV =  , (1)
where FV is the future value of the account; P is your monthly payment (deposit);
r is the monthly percentage yield presented as a decimal;
n is the number of deposits (= the number of years multiplied by 12, in this case).
Under the given conditions, P = 325; r = 0.0475/12; n = 12*9 = 108. So, according to the formula (1), you get at the end of the 20-th year
FV =  =  = $43690.32.
Note that you deposit only 12*9*$325 = $35,100. The rest is what the account earns/accumulates in 9 years.
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On Ordinary Annuity saving plans, see the lessons
- Ordinary Annuity saving plans and geometric progressions
- Solved problems on Ordinary Annuity saving plans
in this site.
The lessons contain EVERYTHING you need to know about this subject, in clear and compact form.
When you learn from these lessons, you will be able to do similar calculations in semi-automatic mode.
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