Suppose you buy a new Toyota for $25,000. You obtain a 4-year amortized loan with equal annual payment beginning one year from today (i.e. first payment made one year from today). The quoted interest rate for the loan is 10%, compounded annually
a. How much will your annual payments be?
b. Please complete the attached amortization schedule :
Year 1 Year 2 Year 3 Year 4 Beginning Balance $25,000 Interest Paid Total Payment Principal Paid Ending Balance $0
c. Assume your car will lose 30% of its market value the first year and further lose $4,000 each year thereafter (i.e. by the end of the first year, your used car can will be sold for $25,000 × (1-30%) = $17,500 on the used car market; and will be sold for $17,500-$4,000=$13,500 on the used car market by the end of year 2; and so on). How much will your used car be worth by the end of year 3 and year 4?
Please fill the used car value in the market value schedule.
Year 1 Year 2 Year 3 Year 4 Ending Car Value $17,500 $13,500
d. With auto loans, it is common for buyers to trade in their cars after the outstanding principal on the car loan exceeds the re-sale value of the used car. After which loan payment will it be profitable for you to trade-in your car? Why? (hint: the car should be sold if it can be sold for more than the balance owed to the dealer)