What is the maximum price Judy can pay for a vehicle?

Question

Judy has $2,000 for a down payment on a vehicle, and she can afford monthly payments of $400. If lenders are currently offering 6% interest on 5-year loans

Answer 1

The maximum price one can pay is the sum of what one can pay now (the down payment of $2000) and the present value of future payments one can make (P = $400 monthly for 5 years).

Here you find the number of monthly payments (N=5 yrs *12) and the effective monthly interest rate (r=6% per year / 12).

You can then compute the present value of the monthly payments as P*(1-1/(1+r)^N)/r.

Then you add this present value to the down payment and you are ready with the maximum price!