Question

Estimating Cash Flows. Jason’s car was just stolen, and the police informed him that they will probably be unable to recover it. His insurance will not cover the theft. Jason has a net worth of $3,000, all of which is easily convertible to cash. Jason requires a car for his job and his daily life. Based on Jason’s cash flow, he cannot currently afford more than $200 in car payments. What options does he have? How will these options affect his net worth and cash flow?

Please show work and provide an explanation. Thank you in advance!

Answer 1

Sol:

Jason net worth = $3,000

Jason can afford to pay EMI of $200 and more

Jason has two options available to finance his new car. He has to select the best option out of both.

If Jason borrow the required amount to purchase a new car, then it will reduce his net worth, however the cash flow will remain unchanged. (Considering that Jason is already paying $200 for his car), his net worth will be reduced by $200 per month. ($3000 - $200 EMI)

On the other hand if Jason convert his net worth into cash, rather than borrow the required amount, then it will reduce his cash flow by $200.