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Valuing A Car Question (Time Value Of Money?)?
I've got a homework question for Finance that I'm struggling with and I was wondering if anyone could help me.
The question is:
"J has just bought himself a new car. He made an initial deposit of £1000. He will make 36 monthly payments of £200 each. The dealer charges 12% APR on credit sales. What is the price of the car?"
I somehow keep coming up with an answer of £5836 but I don't think that's right. Can someone please explain this to me?
1 Answer
- ?Lv 67 years ago
Assuming the payments are made at the end of each month, the present value of the annuity (loan) payments is given by
PV = Pmt x (1 - 1 / (1 + i)^n) / i
i = 12%/12 = 1% per month
PV = 200 x (1 - 1 / (1 + 1%)^36) / 1% = 6,021.50
The deposit needs to be added to this, so car price = 6,021.50 + 1000.00= 7,021.50
