Chapter 1 Problems and Issues 2
2. George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities and discovered that: (i) he owes $80,000 on his house, which he believes to be worth $150,000; (ii) his car is worth $20,000, against which there is $2,000 on the remaining bank loan; (iii) his stock portfolio has risen to $50,000; (iv) he has a $10,000 balance in his bank account, which is earning a 1.2 percent annual interest rate; and (v) the value of his other belongings is $45,000. He has just received his monthly paycheck for $6,000 and he is trying to decide on taking a vacation and on whether or not to pay off his car loan. His monthly expenses are $3,000 which includes the interest expense on his auto loan. He has two possible vacation choices: the Bahamas for $2,000 or a local beach for $1,000. If he has any money left over at the end of the month, it will go into his bank account. If he doesn’t have enough money to cover all of his expenses for the month, he will sell enough of his stock to cover the excess expenses.
a. Use a spreadsheet to input each of George’s assets, (i) to (v), in the first column; the value of these assets in the second column; and the liabilities (if any) against those assets in the third column. In the fourth column compute the net asset value of each of the assets. Total the fourth column to determine George’s net worth at the beginning of the month.
b. Compute the additional net income that George will have from his paycheck plus the interest on his bank account minus the monthly expenses. Use this information to answer parts (c) through (f) below.
c. Repeat part (a) for the end of the month assuming George does not take a vacation and pays off his auto loan.
d. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and only pays $1,000 on the principal of the auto loan.
e. Repeat part (a) for the end of the month assuming that George takes the local beach vacation and pays off his auto loan.
f. Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and pays off the auto loan.
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