Michael is 28 years old and works for Bell as a service technician. His gross annual salary is $72,000 per year, and he expects it to increase by 3% per year going forward. Michael’s annual average tax rate is 30% and his marginal tax rate is 35%. Michaels believes he can earn a rate of return equal to 7% p.a. on his savings.

GM is currently working on a project to convert the Camaro (sports car) into an all-electric vehicle. Michael plans on buying himself a new electric car, in 7 years. The current price of the car is approximately $65,000.

Required:

1. If the price of the car increases, based on the rate of inflation, what will be the price of the car in 7 years? (5 marks)

2. If Michael saves 5% of his after-tax income every year, for the next 7 years, how much money will he have saved towards the purchase of the car? Assume he can earn a rate of return equal to 7% p.a. (5 marks)

3. Assume Michael uses his savings as a deposit toward the purchase of the car and takes out a loan for the balance. If the quoted interest rate on a 5-year car loan is 4.7%, calculate the equal monthly car payments required to pay off the loan, if interest is compounded monthly. (5 marks)

4. What is the effective annual rate on the car loan? (5 marks)

Answer rating: 100% (QA)

To calculate the future price of the car in 7 years based on inflation we need to know the inflation rate Lets assume an inflation rate of 2 per year ... View the full answer