You are thinking of buying a used car for $4,000 for driving to school. Your parents...

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Finance

You are thinking of buying a used car for $4,000 for driving toschool. Your parents are willing to lend you the $4,000 and chargeonly 2.4% APR. They want the loan repaid equally in 48 monthlypayments, with the first payment due at the end of the month inwhich you buy the car. You estimate that the monthly cost ofoperating the car, including gas, insurance, maintenance andlicence fees will be $200 and payable at the start of each month.The cost of a monthly bus pass is $80. You expect that the car willbe totally worn out in four years, with zero resale value, when youare finished school. Your discount rate is 6% compounded annually.
If you have 3 roommates who also need transportation to andfrom school, how much do you need to charge each of them a month inorder to cover all your costs? (You all plan to go to summerschool, so you can assume 12 payments a year).
Does it make financial sense to buy the car? Explain youranswer.

Answer & Explanation Solved by verified expert

3.6 Ratings (625 Votes)

We need to understand the problem a little before we can proceedto solve itWe need to calculate the monthly loan payments of the carWe need to calculate the PV of the additional costsWe need to calculate the total cost of the carWe need to find the per head cost per month of the 4 roommatesincluding See Answer

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Transcribed Image Text

You are thinking of buying a used car for $4,000 for driving toschool. Your parents are willing to lend you the $4,000 and chargeonly 2.4% APR. They want the loan repaid equally in 48 monthlypayments, with the first payment due at the end of the month inwhich you buy the car. You estimate that the monthly cost ofoperating the car, including gas, insurance, maintenance andlicence fees will be $200 and payable at the start of each month.The cost of a monthly bus pass is $80. You expect that the car willbe totally worn out in four years, with zero resale value, when youare finished school. Your discount rate is 6% compounded annually.If you have 3 roommates who also need transportation to andfrom school, how much do you need to charge each of them a month inorder to cover all your costs? (You all plan to go to summerschool, so you can assume 12 payments a year).Does it make financial sense to buy the car? Explain youranswer.