Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10 percent. What will be his consumption next year if Mr. Smith invests in the project and consumes $50,000 this year?
A)$40,000
B)$52,000
C)$60,000
D)$62,000

Question

Quizplus · Accepted Answer

The correct answer is B. Mr. Smith's income next year will be $60,000 + $36,000 = $96,000. He will have to pay back the $30,000 loan, so his consumption next year will be $96,000 - $30,000 = $66,000. However, he has already consumed $50,000 this year, so his total consumption next year will be $66,000 - $50,000 = $16,000.

Mr Smith Has an Income of $40,000 This Year and $60,000