What is Rasheed's approximate borrowing capacity for a car with a monthly payment of $600 for 4 years at 6% interest?

• A. $15,000
• B. $25,548
• C. $30,000
• D. $35,000

Answer: (B)

To determine Rasheed's approximate borrowing capacity for a car based on a monthly payment of $600 for 4 years at a 6% interest rate, we can use the formula for the present value of an annuity.

The formula used to calculate the present value (PV) of an annuity is:

[

PV = P \times \left(\frac{1 - (1 + r)^{-n}}{r}\right)

]

Where:

• ( P ) is the monthly payment ($600 in this case),

• ( r ) is the monthly interest rate (annual rate divided by 12 months),

• ( n ) is the total number of payments (number of years multiplied by 12).

First, we need to convert the annual interest rate of 6% into a monthly rate. This is done by taking 6% and dividing it by 12, giving us a monthly interest rate of 0.5%, or 0.005 in decimal form.

Next, we find the total number of payments. Since Rasheed intends to finance the car for 4 years, we calculate this as:

[

n = 4 \times 12 = 48 \text{ payments}