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20 August, 10:13

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?

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  1. 20 August, 13:06
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    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
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