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 percent. what will be his consumption next year if mr. smith invests in the project and consumes $50,000 this year?

Answer 1

The income and expenses Mr. Smith Incurs this year:

Income: $40,000

Project Cost this year: $30,000

Consumes: $50,000

Consumption this year = $40,000 - $30,000 - $50,000

Consumption this year = -$40,000

Future value of the conumption this year = -$40,000*1.1 = -$44,000

Consumption next year:

Income : $60,000

Income from the project: $36,000

Total income next year = $96,000

Consumption next year = -$44,000 + $96,000

Consumption next year = $52,000

Thus consumption next year is $52,000