   Chapter 5, Problem 26P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is$350. The loan will have a 12% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months?

Summary Introduction

To calculate: PV and loan eligibility to afford a car on finance in 48 months or 60 months.

Introduction:

Present Value of Cash Flow:

It is also called as discounted value. It defines the amount of money that has been invested at a given rate of interest will increase to the amount of future cash flow at that particular time in the future.

Explanation

The most expensive car one can buy in next 48 months is to be calculated at spreadsheet by using “PV” function.

Given,

Monthly payment is $350. Annual percentage rate is 12%. Time period is 48 months. Table (1) Steps required to calculate present value by using “PV” function in excel are, • Select ‘Formulas’ option from Menu Bar of spreadsheet. • Select insert Function that is (fx). • Choose category of Financial. • Then select “PV” and then press OK. • A window will pop up. • Input data in the required field. • Final answer will be shown by the formula that is$13,290.89.

So the present value is $13,290.89. Calculation of most expensive car that can be afforded for 48 months, Mostexpensivecaramount=DownPayment+Presentvalue=$4000+$13,290.89=$17,290.89

So, the most expensive car one can afford for 48 months is of \$17,290.89.

The most expensive car one can buy in next 60 months is to be calculated at spreadsheet by using “PV” function

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