Question

Michael can afford $350 per month for a car payment. he was able to get an auto loan with a 4% interest rate. he wants to pay off the loan in 6 years. how much can he afford to spend on a car, with no down payment? when solving, round numbers to the nearest hundred thousandth. round your final answer to the nearest cent. What is the principal amount (car price) that Michael can afford?

A. Calculate the value using the formula.
B. $20,000
C. $25,000
D. $30,000

Answer 1

Michael can afford a car with a principal amount of approximately $20,000.

Step-by-step explanation:

To calculate the principal amount that Michael can afford for a car, we can use the formula for the present value of an annuity. The formula is:

Present Value = Payment Amount * ((1 - (1 + Interest Rate)^(-Number of Periods)) / Interest Rate)

In this case, Michael can afford $350 per month for 6 years with a 4% interest rate. Plugging these values into the formula, we get:

Present Value = $350 * ((1 - (1 + 0.04)^(-6)) / 0.04) = $19,877.36

Therefore, Michael can afford a car with a principal amount of approximately $19,877.36, which rounds to $20,000 (option B).