Julia earns $60,000 each year for two consecutive years.She has an option to invest in treasury funds to earn a 5% interest today,and consume the entire amount in the second year.Alternatively,she can choose to borrow money at 5% against the second period's income.Assume that the optimum decision for her is to invest money at 5%.Determine the maximum amount she could consume in period 2.
A) $60,000
B) $0
C) $123,000
D) $117,143

Question

Quizplus · Accepted Answer

If Julia invests her first year's income of $60,000 at a 5% interest rate, she will have $60,000 * 1.05 = $63,000 from this investment in the second year. Adding this to her second year's income of $60,000 gives her a total of $123,000 to consume in the second year.

Julia Earns $60,000 Each Year for Two Consecutive Years