Lab 3A This is a critical thinking exercise. The purpose of this assignment is t
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Lab 3A This is a critical thinking exercise. The purpose of this assignment is to give you more experience in completing an amortization schedule so that the next time you purchase something, you will be familiar with this process and can make an amortization schedule for your individual needs. The following scenario was given to a student, and this was the answer he/she calculated. So, first I want you to calculate the monthly payment for the scenario. Scenario: You purchased a new vehicle for $16,000 on Dec 1, 2013. Your first monthly payment will be due on January 1, 2014. The interest rate is 3.50% and the finance period is 4 years Calculate now Answer: If you calculated S692.90 or somewhere close to that, you have made the same mistake as the student in my example. Think about how you have calculated this, and why this does not make sense. If you are questioning the interest rate, the interest rate does not say it is a monthly rate, quarterly rate, or etc; so it is a yearly rate. I worded the problem this way on purpose to help you be aware of the fact that real-life problems as well as many of the problems in Chapter 3 and on the tests are worded this way (leaving out the words "yearly rate"). Anytime a problem does not specify the rate per 2?2 (month, etc), then it is always a yearly rate. Re-calculate. Did you get $357.70 now or the first time? I rounded the monthly interest rate. Take the yearly rate 0.035 and divide by 12-0.00291666667. Always round on the second digit that repeats. So, I used 0.0029167 in my formula. In my scenario, I had the student prepare a monthly amortization schedule similar to Table 1 on page 158 in your book. The amortization schedule in Figure A below is what the student prepared. Create your amortization schedule using the correct monthly payment and compare the differences.Explanation / Answer
The basic calculation that the student should have done is that the student should have was to calculate the total amount of payments that is being made in this case. Here total amount is (as per the student’s calculations) is $33,259.60 (this includes principal and interest). As the principal component is 16,000 the interest component will be = 33,259.60 – 16,000 = 17,259.60. Thus, as per student’s calculations, the amount of interest paid is greater than the amount borrowed. This is the red flag. The student should have used the PMT function in excel using the following variables: rate = 3.5%/12, nper = 48 and PV = 16,000. This would have given him a monthly payment amount of $357.70
The student used 3.5% as the monthly rate and so the annual rate used by the student was 3.5%*12 = 42%. However the annual rate was 3.5% and this will make the monthly rate as 0.29% (i.e. 3.5%/12)
This chapter has helped me to learn the process of calculating payments by helping me understand the concept of reducing balance, how interest is computed on a monthly basis and the basics of computing equated monthly installments (EMI) in different scenarios.
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