Finance: Time value of money paper
Henry could afford to finance his car for 48 month if it was financed at a rate of $1 + 0.10 = 1.10. Calculating this is done by taking $30,000 in loanable funds and multiplying it by 1 + the APR (1 + 0.10 = 1.0). To get the maximum amount Henry can afford for this loan arrangement, multiply the result by 48 monthly payments ($630.22 x 48 = $31,013).
The calculation includes both principal and interest to determine how much Henry must repay over time to keep up with his payments. This allows Henry to remain within his financial means when he purchases a car that suits his needs. This calculation will change as interest rates fluctuate from one year of the following. APRs also depend on the market conditions. Henry should therefore be mindful of this movement when considering financing for cars. He wants to ensure that he doesn’t become too financially strapped while still receiving good quality transport at a fair price.