A

Your friend is shopping for a car and has asked you to help her figure out how much she can afford. She tells you she has $3,000 to use for the down payment. She says shed love to buy a Subaru Outback. The car is priced at $26,645. She shows you a brochure she picked up at the local branch of her bank. The bank is offering 60-month car loans with an APR of 3.75%, compounded monthly. You friend wants to know what she will need to pay in car payments if she buys her dream outback

B. Your friend tells you that she cannot afford the amount you calculated, unfortunately. She tells you that after rent and basic living expenses, she can afford about $350 per month as a car payment. Her bank is offering two loan options: the original loan above, or 6-year with an APR of 4.25% (compounded monthly). What is the maximum price of the car she can afford under each loan?

C. Now that your friend knows how much she can spend on a car, she also wants to be a smart consumer in evaluating the two loans. In each case, what will be her total outlay at the end of the loan? That is, in what will be the total she will pay in interest and in principal under each of the two loans?

D. You have finally paid off your four-year car loan and now have an extra $225 to spend each month. Your parents suggest that you use some of the extra money to start saving for your next car. Their reasoning is that this would allow you to take a smaller car loan (or perhaps no loan at all), thereby minimizing your interest payments. You anticipate that your car has at least another 8 years of life. If you save $150 month at 3.2% APR, compounded monthly, how much will you have when your car reaches the end of its useful life?

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