Hi i have been struggling with this question and cannot figure it out!! please help

[reasoner8032]

You are thinking of buying a used car that costs $6000 and has an expected zero resale value at the end of 4 years. Both Campus Cars and Deals on Wheels are offering special low-rate car loans to York students. Campus Cars will loan you the $6000 and charge you a 10.25% EAR and want the loan repaid in 48 equal monthly payments, with the first payment due immediately. Deals on Wheels will loan you the purchase price of the car at a 9.8% APR with the first of 48 payments starting in one month’s time. Your estimated costs of operating the car, including insurance, are $215.00 per month, payable at the end of each month and increasing each month at an annualized rate of 6% (APR).

a) What is the monthly payment for the Campus Cars loan?
b) What is the monthly payment for the Wheels on Deals loan?
c) What is the present value of your operating costs if your opportunity cost of funds is 9% (APR)?

 

[tkhunny]

Stop struggling ans start defining.

What is "APR"? How do you change that to a monthly rate?
What is "EAR"? How do you change that to a monthly rate?

Let's see if we get that far.

 

[reasoner8032]

Stop struggling ans start defining.

What is "APR"? How do you change that to a monthly rate?
What is "EAR"? How do you change that to a monthly rate?

Let's see if we get that far.

Hi again, so this is what i put so far - am i completely off base?

A) What is the monthly payment for the Campus Cars loan? (5 marks)

Period Interest Rate = (1+EAR)^(1/m) - 1
=(1+0.1025)^(1/12) – 1
=0.00816

INPUT: n= 48, i=0.8165, PV=6000, PMT =?
ANSWER: 220.05


B) What is the monthly payment for the Wheels on Deals loan? (5 marks)

Turn APR into EAR:
EAR = (1 + APR/m) ^m - 1
=(1+(0.098/12))^12) – 1
=(1.008167^12) – 1
=0.1025
=10.25%

Then:
Period Interest Rate = (1+EAR)^(1/m) - 1
=(1+0.1025)^(1/12) – 1
=0.00816

INPUT: n= 48, i=0.8165, PV=6000, PMT =?
ANSWER: 220.05


C) What is the present value of your operating costs if your opportunity cost of funds is 9% (APR)? (5 marks)

PV= C * [(1/r) – (1/ (r((1+r)^t)))]
PV=215*[(1/0.09) – (1/ (0.09)(1.09)^48)]
PV=215*(11.1111 – (1/5.6327))
PV=215*(11.1111-0.1775)
PV=215*10.9336
PV=2350.724 (OR if using calculator it comes to 2350.19 ) of operating costs

 

[tkhunny]

A) Something funny in there.

----- 1) Is your calculator set for "Beginning" of period payments?
----- 2) That doesn't explain the whole error. $220.05 is WAY too big. You'll pay it off in 30 months.

B) Why on Earth would you go to all the trouble to convert to 10.25% EAR after you already have what you need right up front?

Your 3rd line: "=(1.008167^12) – 1" contains the required "0.008167". It's just a division problem. 0.098 / 12 = 0.008167