You have been approached by Simpson, a 23 years old fresh graduate for financial
ID: 2616414 • Letter: Y
Question
You have been approached by Simpson, a 23 years old fresh graduate for financial
advice. Simpson is a risk-taker who has limited knowledge of Finance. He has
provided the following information about his financial situation:
with a local financial institution. Interest rate for this car loan is 19.95% per
annum. The market price of this car is estimated to be $6,000.
He also has a hire purchase loan of $2000.00 for a new laptop. He has to settle
this loan over 5 years at 24.9% per annum.
He is spending about $150 per week on food, $60 per week on petrol and $140
per week on entertainment and incidentals.
To complete his degree, Simpson has a student loan of $25,000.00 from NZ
government. Since he is earning over $367 a week before tax, he has started
making payment amounting $225.33 per month towards his loan.
He has accumulated $1523.00 in his Kiwisaver fund.
1/Calculate Simpson’s asset, liability and net worth?
2/Inform Simpson on his weekly income, weekly expenses and weekly savings.
3/Calculate Simpson’s monthly debt safety ratio. Interpret the answer for him.
4/Simpson would like to accumulate $125,000 to buy his first home five years from
now. How much does he has to save each week in order to achieve this goal?
(Assumptions: Interest rate is 4% per annum and compounded weekly, exclude
Kiwisaver)
per week after tax and other deductions.
Simpson is currently renting an apartment, paying $350.00 per week for rent
and utilities.
To purchase basic home furnishing for his apartment, he has just signed a 18-
month contract with Woolies’ Decor on an instalment plan of $90.00 per month.
This contract comes with new home furnishing worth $1620.00.
To finance his car purchase, Simpson has just taken a 5-year car loan for 8,000
Explanation / Answer
Simpson's Assets Simpson's Liabilities New home furnishing $ 1,620.00 Contract with Woolies Décor $ 1,620.00 Car $ 6,000.00 Car loan $ 8,000.00 Laptop $ 2,000.00 Student loan $ 25,000.00 Kiwisaver fund $ 1,523.00 Total Assets $ 11,143.00 Total liabilities $ 34,620.00 Net Worth = Total Assets - Total Liabilities `= 11143-34620 = $ -23,477.00 Simpson's Weekly income EAT and other deductions $ 902.35 Simpson's Weekly Expenses Rent & Utilities $ 350.00 New home furnishing installment (Note-1) $ 20.77 Interest on Car loan @ 19.95% p.a. (Note -2) $ 30.69 Interest on Hire purchase loan @ 24.90% p.a. (Note -3) $ 9.58 Food $ 150.00 Petrol $ 60.00 Entertainment & incidentals $ 140.00 Payments towards Student loan (Note-4) $ 52.00 Total Weekly Expenses $ 813.04 Simpson's Weekly Savings = Earnings - Expenses `=902.35 - 813.04 = $ 89.31 Note 1: New home furnishing installment (Weekly) Note 2: Interest on Car Loan (Weekly) Assuming 52 Weeks in a year Assuming 52 Weeks in a year $ 90.00 per month = $ 1080.00 per annum Interest per annum = 8,000 * 19.95% = $ 1,596.00 Weekly installment = $1080/52 weeks = $ 20.77 Weekly Interest = $ 1,596/52 weeks = $ 30.69 Note 3: Interest on Hire purchase loan (Weekly) Note 4: Payment towards Student loan (Weekly) Assuming 52 Weeks in a year Assuming 52 Weeks in a year Interest per annum = 2,000 * 24.90% = $ 498.00 $ 225.33 per month = $ 2704 per annum Weekly Interest = $ 498/52 weeks = $ 9.58 Weekly payment = $2704/52 weeks = $ 52.00 Simpson's Monthly Debt pay (A) New home furnishing installment 90 Interest on Car loan @ 19.95% (8000*19.95%)/12 133 Interest on Hire purchase loan @ 24.90% (2000*24.90%)/12 41.5 Payments towards Student loan 225.33 Total 489.83 Simpson's Monthly Earnings (B) Assuming 52 weeks per annum `= $ 902.35 * 52 weeks/12 months = $ 3,910.18 Simpson's Debt Safety Ratio = (A/B)*100 = (489.83/3910.18)*100 = 12.53% Simpson's 1st home Time, t = 5 years = 260 weeks Amount, A = $ 125,000 Interest rate, r = 4% p.a. compounded weekly Principal to be paid, P = ? A = P [1 + (r/n)]^t 125000 = P [1 + (0.04/52)]^260 P = 125000/ [1+(0.04/52)]^260 = 125000/[1.000769]^260 = 125000/1.221236 = 102355.3187 So, totally he need to invest $ 102355.3187 Therefore, per week = $ 102355.3187/260 weeks = $ 393.67 per week
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