Some Lending Institutions Calculate the Monthly Payment M on a Loan

question 3

Multiple Choice

Some lending institutions calculate the monthly payment M on a loan of L dollars at an interest rate r (expressed as a decimal) by using the formula: where k = [1 + ( r / 12 ) ] ^12t and t is the number of years that the loan is in effect. An automobile dealer offers customers no-down-payment 7-year loans at an interest rate of 7%. If a customer can afford to pay $108 per month, find the price of the most expensive car that can be purchased.

• A)$ 7,145.44
• B)$ 7,155.79
• C)$ 7,161.43
• D)$ 7,165.81
• E)$ 7,164.60

---

Definitions:

Minimum Required Rate

The lowest acceptable rate of return on an investment, as determined by management or investors.

Residual Income

The amount of income that an individual or company retains after accounting for all operating expenses and cost of capital.

Operating Assets

Assets that are used by a company in its daily operations to generate revenue, excluding any investment or non-operational assets.

Net Operating Income

The profit derived from a company's regular business activities, excluding deductions of interest and taxes.