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Mary graduated from York University’s School of Administrative Studies with her BAS degree in accounting six months ago. She lives with her parents, who charge her no rent or food costs. She has landed a good job as ab accountant for a hotel chain and takes home $3000 per month after taxes and other deductions. She expects her take home pay will rise 3% per year for the next few years. She has to start paying off her student loan of $20,000. The interest is 4% p.a., compounded monthly and the amortization period is 5 years. She wants to buy a car and will have to finance the entire $15000 purchase price at 4% p.a., compounded monthly with a term of 3 years. She pays $700 per month for the things her parents dont pay, like transportation, clothes and entertainment. This cost will rise at 2% p.a. At the end of next year, she will travel to England for her brother’s wedding at a total cost of $6000 for clothes, travel, holiday, and gifts. At the end of three years, her vacation entitlement rises to three weeks and she plans a European cruise costing 10,000. She will invest savings at a rate of 3% EAR, taxable at a marginal rate of 30%.
(A) What discount rate should Mary use for her savings if she makes the monthly payments on her two loans exactly as scheduled?
(B) How much will Mary have saved at the end of 3 years?
(C) What is Mary’s correct discount rate? That is, what is the opportunity cost of her money?
Please show all work so I can understand how the answer is gotten.
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