Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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![### Problem 15: Loan Calculation for a Riding Lawn Mower
**Scenario:** Bernie purchased a riding lawn mower for $1,320. The store offered him a 3-year add-on loan at an annual rate of 8.25%.
**Questions:**
1. How much interest will he pay?
2. What are his monthly payments?
To solve this, we need to calculate the total interest paid over the life of the loan and then determine the monthly payments.
**Step-by-Step Solution:**
1. **Calculate the total interest:**
- Principal Amount (P): $1,320
- Annual Interest Rate (r): 8.25%
- Time Period (t): 3 years
The formula for simple interest is:
\[
\text{Interest} = P \times r \times t
\]
Converting the interest rate into decimal form:
\[
r = \frac{8.25}{100} = 0.0825
\]
Plugging in the values:
\[
\text{Interest} = 1320 \times 0.0825 \times 3 = 326.70
\]
So, the total interest Bernie will pay over 3 years is $326.70.
2. **Calculate the total amount to be repaid over the 3 years:**
\[
\text{Total Amount} = \text{Principal} + \text{Interest} = 1320 + 326.70 = 1646.70
\]
3. **Calculate the monthly payment:**
- Number of monthly payments over 3 years:
\[
\text{Total Months} = 3 \times 12 = 36
\]
\[
\text{Monthly Payment} = \frac{1646.70}{36} \approx 45.74
\]
Bernie's monthly payments are approximately $45.74.](https://content.bartleby.com/qna-images/question/f8311114-a7cb-49e3-b44e-1e05de4bc29a/193faef1-500c-4058-9e4b-19539a4f9f10/qpjbfu.png)
Transcribed Image Text:### Problem 15: Loan Calculation for a Riding Lawn Mower
**Scenario:** Bernie purchased a riding lawn mower for $1,320. The store offered him a 3-year add-on loan at an annual rate of 8.25%.
**Questions:**
1. How much interest will he pay?
2. What are his monthly payments?
To solve this, we need to calculate the total interest paid over the life of the loan and then determine the monthly payments.
**Step-by-Step Solution:**
1. **Calculate the total interest:**
- Principal Amount (P): $1,320
- Annual Interest Rate (r): 8.25%
- Time Period (t): 3 years
The formula for simple interest is:
\[
\text{Interest} = P \times r \times t
\]
Converting the interest rate into decimal form:
\[
r = \frac{8.25}{100} = 0.0825
\]
Plugging in the values:
\[
\text{Interest} = 1320 \times 0.0825 \times 3 = 326.70
\]
So, the total interest Bernie will pay over 3 years is $326.70.
2. **Calculate the total amount to be repaid over the 3 years:**
\[
\text{Total Amount} = \text{Principal} + \text{Interest} = 1320 + 326.70 = 1646.70
\]
3. **Calculate the monthly payment:**
- Number of monthly payments over 3 years:
\[
\text{Total Months} = 3 \times 12 = 36
\]
\[
\text{Monthly Payment} = \frac{1646.70}{36} \approx 45.74
\]
Bernie's monthly payments are approximately $45.74.
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