Question

You are 20 years old and have completed your BBA and want to pursue further education but you don’t want to take money from your father. Your plan is to start working and earn enough money so that you can finance your degree on your own and get yourself enrolled in five years’ time. You estimate that the annual cost of doing an MBA 5 years from today will be PKR 400,000 and the program will be two years long. You will need the money at the beginning your program so that you are not worried about how to clear your dues during your studies. Luckily you go for a job interview and they hire you and you start working at a salary of PKR 25,000. So you decide that 50% you will deposit in a saving account at a 10% rate with monthly compounding for your further studies and the remaining amount you will use for your daily expenses.

1. Will you be able to meet your goal at this current saving rate?
2. What percentage of your salary should you save if you want to have exactly your university expenses amount?
3. How would your answer to part 1 change if the saving account rate changed to 5%? Comment on your answer.
4. If you are given an option to invest at the 10% saving rate with monthly compounding or 10.5% semiannual compounding, which would you chose? Explain your answer

Answer 1

Answer:

First part

Information given in question:

MBA Fees PKR: 400000

Salary per month 25000PKR

50% deposit in saving account for 2years @10% compund interest = 25000*50*24(2years)=300000

So principal amount is PKR 300000

And compounded interest

Where:

• FV = Future Value
• PV = Present Value
• i = period interest rate expressed as a decimal
• n = number of compounding periods

So Compund interest annually

Year	Year Interest	Total Interest	Balance
1	31,413.92	31,413.92	331,413.92
2	34,703.37	66,117.29	366,117.29

So Principal is 300000

Interest is 66117.29 So the total amount is available after 2year 366117.29

Need 400000 for MBA but get 366117.29 So this will not meet our goal.

Second part

To meet the exact expenses of MBA of PRK 400000 we need to deposit 54.527333% of per month salary in saving account.

saving amount for 2years= 25000*54.527333%*24=327764

So compund interest monthly

Period	Period Interest	Total Interest	Balance
1	2,731.37	2,731.37	330,495.37
2	2,754.12	5,485.49	333,249.49
3	2,777.08	8,262.57	336,026.57
4	2,800.23	11,062.80	338,826.80
5	2,823.55	13,886.35	341,650.35
6	2,847.09	16,733.44	344,497.44
7	2,870.81	19,604.25	347,368.25
8	2,894.74	22,498.99	350,262.99
9	2,918.85	25,417.84	353,181.84
10	2,943.19	28,361.03	356,125.03
11	2,967.70	31,328.73	359,092.73
12	2,992.44	34,321.17	362,085.17
13	3,017.38	37,338.55	365,102.55
14	3,042.52	40,381.07	368,145.07
15	3,067.88	43,448.95	371,212.95
16	3,093.44	46,542.39	374,306.39
17	3,119.22	49,661.61	377,425.61
18	3,145.21	52,806.82	380,570.82
19	3,171.43	55,978.25	383,742.25
20	3,197.85	59,176.10	386,940.10
21	3,224.50	62,400.60	390,164.60
22	3,251.37	65,651.97	393,415.97
23	3,278.47	68,930.44	396,694.44
24	3,305.78	72,236.22	400,000.22

Annually

Year	Year Interest	Total Interest	Balance
1	34,321.17	34,321.17	362,085.17
2	37,915.05	72,236.22	400,000.22

So here we can meet the exact expenses of MBA.

THIRD PART

If the percent is 5% So interest is

Year	Year Interest	Total Interest	Balance
1	15,348.57	15,348.57	315,348.57
2	16,133.83	31,482.40	331,482.40

Will not be able to meet the MBA expeneses.

To meet the expenses of MBA need to deposit 60.35% of salary in saving Account So amount depsoit in saving

25000*60.35%*24=362100

Year	Year Interest	Total Interest	Balance
1	18,525.73	18,525.73	380,625.83
2	19,473.54	37,999.27	400,099.37

We choose 10.5% interest rate because in 10.5% to get the exact amount need to save 54.09% from salary instead of 54.52733%

Year	Year Interest	Total Interest	Balance
1	35,766.53	35,766.53	360,316.55
2	39,708.13	75,474.66	400,024.68