Question

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10% (Mr. Smith can both lend and borrow at this rate). What will be his consumption next year if Mr. Smith invests in the project and consumes $50,000 this year

Answer 1

"$52,000" is the correct answer.

Step-by-step explanation:

Given:

This year income,

= $40,000

Next year income,

= $60,000

Market interest rate,

= 10%

or,

= 0.1

Now,

The next year consumption will be:

=
`[40,000 - 30,000 - 50,000]* 1.1 + (60,000 + 36,000)`

=
`-40,000* 1.1+96000`

=
`-44000+96000`

=
`52000` ($)