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:

Simpson lives in Auckland and is working full time as a graphic earning $902.35 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

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)

Answer 1

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