Example 1 - Loan calculations

Suppose you finance the purchase of a car with a 5-year loan at 5.5% annual interest, compounded monthly. The purchase price of the car is $19,500, and the down payment is $3,000. What are the required monthly payments? What is the largest loan you can afford if your maximum monthly payment is $300? Assume that the payments start at the end of the first period.

Solution. The following cash flow diagram illustrates the loan calculations:

PV = $16,500

FV = 0

 

 

l%YR = 5.5

 

 

N = 5 x 12 = 60

 

 

P/YR = 12; End mode

 

 

 

 

 

 

1

2

59

60

 

PMT = ?

 

 

Start the Finance Solver, selecting P/YR = 12 and End payment option.

•Enter the known TVM variables as shown in the diagram above. Your input form should look as follows:

•Highlighting the PMT field, press the soft menu key to obtain a payment of -315.17 (i.e., PMT = -$315.17).

•To determine the maximum loan possible if the monthly payments are only $300, type the value –300 in the PMT field, highlight the PV field, and

press the soft menu key. The resulting value is PV = $15,705.85.

Using the Finance Solver

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