Question

Suppose Alice buys a car and obtains a 5 year loan for $25,000 at an interest rate of 6%.

Suppose A is the amount borrowed, r is the interest rate (in decimal form), and m is the total number of monthly payments.

Let w = (r)/(12)

Then the formula to determine the monthly payment amount for a loan is given by

(Aw)/1-(1)/ (1+w)^m


(a) What is the numerical value of w?

(b) What is the monthly payment? (Show values substituted in the formula, and calculate the numerical amount.) Note: Since the loan is an amount in dollars and cents, it’s important to maintain a high degree of precision in intermediate calculations, and round to the nearest cent at the end.

(c) If Alice makes all 60 payments, how much will have been paid altogether?

Answer 1

The amortization formula that you should be using is given here:
http://www.vertex42.com/ExcelArticles/amortization-calculation.html
The "A" term in that formula is the payment required per period. What you are using for A is the principal (P) in that formula. Your numerical value of w should be 0.005.

Answer 2

What should the set up of this equation look like? I tried to put it together and this is what I got. What am I doing wrong? Thanks!

w=(r)/(12)

(0.005)=(0.06)/(12)

m = (Aw)/1 - 1/(1+w)^m

(25000)(0.005)/1- (1)/(1+0.005)^60

Is any of this correct?