Question

Danny recently borrowed $30,000 from the Eicher Credit Union with the loan repayments specified at $1,000 payable at the end of each month for the next 3 years. He has annual earnings of $75,000 which are likely to remain constant over the next 3 years. Calculate Danny’s purchasing power for each of the next 3 years.

there is no interest rate the question is just like this

Answer 1

Purchasing Power refers to the amount which the individual can use to purchase goods and services at a given point of time.

Loan Amount received also increases the purchasing power because one can use the money to purchase goods and services. Here it is considered that the money has been used in purchasing any good or service, which is exausted at the time the loan is received.

So the Purchasing power of Danny will be annual earning less the amount of loan payments made during the year.

Annual Earnings = $ 75,000

Monthly loan Payments = $ 1,000

Total yearly payments = $ 1000 * 12 = $ 12,000

Purchasing Power = $ 75,000 - 12,000

= $ 63,000

Without any other additional loan payments being made the purchasing power remains constant for all the three years.

So, the purchasing power for each year comes out to be $ 63,000.