8 You are a CFA (chartered financial analyst). Madonna has come to you because s

Question

8 You are a CFA (chartered financial analyst). Madonna has come to you because she needs help card bills. She owes the amounts on her credit cards shown in Table 43. Madonna is willing to allocate up to $5,000 per month to pay off these credit cards. All cards must be paid off within 36 months. Madonna's goal is to minimize the total of all her payments. To solve this problem, you must understand how interest on a loan works. To illustrate suppose Madonna pays $5,000 on Saks during month 1 Then her Saks balance at the beginning of month 2 is paying off her credit 20,000 - (5,000 - .005(20,000)) This follows because during month 1 Madonna incurs 005(20,000) in interest charges on her Saks card. Help Madonna solve her problems!

Explanation / Answer

First pay for higher rate card
Pay 5000 to Macy's every month..It will take=NPER(1.5%,-5000,40000)=8.6 months
So pay 5000 to Macy's for 8 months and pay =FV(1.5%,8,-5000,40000)=2895 in the 9th month

Pay 2105 to Bloomingale's in 9th month..Balance in the beginning of 9th month=50000*1.01^8-(2105-1%*50000*1.01^8)=52579
Pay 5000 to Macy's every month from 10th month onwards..It will take=NPER(1%,-5000,52579)=11.17 months
So pay 5000 to Bloomingdale's for 10th-20th months and pay =FV(1%,11,-5000,52579)=826 in the 21st month

Pay 4174 to Saks' in 22nd month..Balance in the beginning of 23rd month=20000*1.005^22-(4174-0.5%*20000*1.005^22)=18257
Pay 5000 to Saks' every month from 23rd month onwards..It will take=NPER(0.5%,-5000,18257)=3.69 months
So pay 5000 to Saks' for 23rd-25th month and pay =FV(0.5%,3,-5000,18257)=3457 in the 26th month

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