To purchase a new car, you borrow $25,500. A car dealer offers a 5 year loan at

Question

To purchase a new car, you borrow $25,500. A car dealer offers a 5 year loan at the interest rate of 4% compounded annually. If you make only 1 payment at the end of the loan period, repaying the principal and interest:

a. What is the number of time periods (n) you should use in solving this problem?

b. What rate of interest (i), per period of time shoudl be used?

c. Is the present single amount of money (P) known? (Yes or No)

d. Which time value factor should be used to solve this problem?

e. What is the total amount that must be paid back?

f. How much of the total amount repaid represents interest?

Explanation / Answer

a. number of time periods = 5

b. rate of interest = 4%

c. present single amount of money =25,500

d. time value factor = (1+4%)^5 = 1.2166

e. total amount that must be paid back= 25500*1.2166 =$31023.3

f. interest = $31023.3-25500=$5523.3

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