Mary Mickaella R.

Ventura

BSA 3-A
Financial Management Final Exam

Item no. 6

You’ve recently finished your Accounting undergraduate degree so you wanted to purchase a new BMW
immediately.

The car costs about $21,000. The bank quotes an interest rate of 15% APR for a 72-month loan with a 10
percent down payment.

You plan on trading the car in for a new one in two years.

DRAW TIMELINE of Cash payment, cash receipt and rate. (make use you place the arrow in the right
direction

What is the present value annuity factor that you have to use to compute your monthly payment?

What would be your monthly payment be?

what is the effective interest rate on the loan?

What would be the annuity present value factor that you would use to compute the loan balance you
have to take when you trade in the car?

Solution:

Given amounts:

Interest Rate 15% / 12 = 1.25% monthly

72 periods @ 1.25%:

PV Annuity Factor = (1-PV Factor)/r

= [1 – (1/1.012572)]/.0125

= [1 – (1-2.4459)]/.0125

= (1 - .4088)/.0125

= 47.2925 or 47.29

PV @ 10%:
90% of 21, 000 = 18, 900

Formula used:

18, 900 = C x Annuity PV Factor

= C x 47.2925

C = 18, 900 x (1/47.2925)

C = 18, 900 x .02115

C = 399.64 per month or 400.

Actual interest rate of the loan: 1.25% / month

Effective Annual Rate:

EAR = (1.0125)12 – 1 = 16.08%

Balance in 2 years:

24 payments

72 – 24 = 48 payments left

PV of 48 monthly payments of 399.64 @ 1.25%:

PV Factor of Annuity = (1 – PV Factor)/r

= [1 - 1/1.012548)]/.0125

= [1 – 1/1.8154)]/.0125

= [1 - .5509)/.0125

= 35.9315

Present Value:

PV = 399.64 x 35.9315 = 14, 359.66 loan in 2 years.