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Compute how much a new car can cost based on income constraints

You have finally decided that this is the year that you purchase that exotic car (Aston Martin Vanquish (007's car), Porsche Carrerra GT, Bentley Continental etc...etc.). But your spouse (Salma Hayak or Brad Pitt depending on who you are) insists that you must decide on the maximum purchase price you can afford before you ever look at your first car.

Assume that the only source of money to finance your purchase is based on your family income. The details of which follow...

Your annual income is $50,000 before taxes which is taxed at a flat rate of 30%. Of the after tax income you can commit 25% annually towards the purchase of the car for the next 5 years (starting 1 year from today).

Your spouse's annual income is $5,000,000!!! (remember it's Salma or Brad) before taxes which is taxed at a flat rate of 50%. Of the after tax income your spouse will only commit 0.5% annually to the purchase of your car for the next 3 years (starting 1 year from today).

The prevailing rate of interest on auto loans in the market place is 7% compounded annually.

Assuming you can get an auto loan, can you afford one of the luxury cars which are priced today at over $250,000? Or will you have to buy a Honda Odyssey (which costs approx $50,000) mini van which is that much more practical as you have 3 small children. Show your calculations to support your decision.

Solution Preview

You can see there is a problem before even making the calculations:

Your income of $50,000 x .70 = 35,000 of disposable income
$35,000 x 25% x 5 years = $43,750

Spouse income of 5,000,000 x .50 = 2,500,000 of disposable income
$2,500,000 x .5% x 3 years = ...

Solution Summary

The solution calculates available funds for an auto purchase, amortizes the loan with variable payment amounts and gives the maximum purchase price allowed based on the income.

$2.19