Math Problem Statement

Philip buys a new car, where he makes $500 down payment and finances the remaining balance at the interest rate of 6% compounded monthly. The loan will be amortized (paid back) with 36 monthly payments of $110 each What is the cash price of this car?

Solution

To determine the cash price of the car, we need to use the amortization formula for the loan. The formula for the present value (loan amount) of a series of monthly payments is:

PV=P×(1(1+r)nr)PV = P \times \left( \frac{1 - (1 + r)^{-n}}{r} \right)

Where:

  • PVPV is the present value (the loan amount).
  • PP is the monthly payment ($110).
  • rr is the monthly interest rate (annual interest rate divided by 12).
  • nn is the total number of payments (36 in this case).

Step 1: Calculate the monthly interest rate

The annual interest rate is 6%, so the monthly interest rate is:

r=6%12=0.0612=0.005r = \frac{6\%}{12} = \frac{0.06}{12} = 0.005

Step 2: Calculate the loan amount

Now, plug the values into the amortization formula:

PV=110×(1(1+0.005)360.005)PV = 110 \times \left( \frac{1 - (1 + 0.005)^{-36}}{0.005} \right)

Let me calculate this.The loan amount, or the present value of the financed portion of the car, is approximately $3,615.81.

Step 3: Calculate the cash price of the car

The cash price of the car is the sum of the loan amount and the down payment of $500:

Cash Price=3615.81+500=4115.81\text{Cash Price} = 3615.81 + 500 = 4115.81

Thus, the cash price of the car is approximately $4,115.81.

Would you like further details or have any questions?

Here are 5 related questions to expand on this concept:

  1. How would the cash price change if the interest rate were higher?
  2. What happens to the monthly payments if the loan term is extended to 48 months?
  3. How much total interest does Philip pay over the life of the loan?
  4. What would be the cash price if Philip made a larger down payment?
  5. How would the loan amount change if the interest were compounded annually instead?

Tip: Compounding frequency (monthly, quarterly, yearly) can significantly affect the overall cost of a loan due to interest accumulation.

Ask a new question for Free

By Image

Drop file here or Click Here to upload

Math Problem Analysis

Mathematical Concepts

Loan Amortization
Compound Interest
Monthly Payments

Formulas

Present Value formula for loan amortization: PV = P × ((1 - (1 + r)^(-n)) / r)

Theorems

Amortization Formula

Suitable Grade Level

Grades 10-12