Financial Performance of Madea - Essay Example

Part A Question The average net monthly salary of Medea over one year is £375.6. This figure has been arrived at after dividing net salary income over the year by number of months in the year. Some other calculations that were necessary for the determination of net salary income for the year are shown in the table below: Calculation of Net Income for Medea (Amounts in £) Gross monthly income for first six months (£2060*6) 12360 Gross monthly income for last six months ((£2060+2%*2060)*6) 12607.2 Total 24967.2 Less: Expenses yearly council tax 1500 yearly utility bills (£300*4) 1200 food expenses for the year (£90*52) 4680 leisure and gift for the year (£60*12) 720 transport cost for the year (£30*52) 1560 rent expense for the year (£900*12) 10800 Childcare expenses (£130*48)   Total expenses 20460 Net income/salary for the year before tax and NI deductions 4507.2 Less: Tax and NI deductions for the year - Net income/salary for the year after tax and NI deductions 4507.2 Average monthly cash flows (Amounts in £) Cash Inflows: First 6 months Last 6 months Monthly salary 2060 2101.2 Less Cash outflows: Council tax (apportioned for 1 month) 125 125 Monthly utility bills (£300*4)/12 100 100 food expenses for one month (£90*52)/12 390 390 leisure and gift for 1 month 60 60 transport cost for one month (£30*52)/12 130 130 rent expense 900 900 900 Total 1705 1705 Average monthly cash flow 355 396.2 It is evident from the above calculations that the average monthly cash flows for Madea remain below £400 throughout the year, therefore it is not possible for her to finance her bicycle in these circumstances even if the bicycle costs her the lowest £400. a) Average Monthly Cash Flows after Support from Jason (Amounts in £) Cash Inflows: First 6 months Last 6 months Gross monthly income 3810 3851.2 Less Cash outflows: Council tax (apportioned for 1 month) 166.6666667 166.6666667 Monthly utility bills 120 120 food expenses for one month 780 780 leisure and gift for 1 month 90 90 transport cost for one month 130 130 rent expense 900 900 900 Total expenses 2186.666667 2186.666667 Average monthly cash flow 1623.333333 1664.533333 b) Benefit of the alternative to Medea The support from Medea’s boyfriend Jason will benefit Medea a lot as is evident from the table. The average monthly cash inflow has increased by a significant amount and now she has sufficient amount of ready cash. This allows Medea to finance her bicycle as the bicycle will cost her £400 to 600 while the cash available with her now is far exceeding the expected cost of that bicycle. c) Comparison of Medea’s household equalized net income with and without Jason (and Argo) Calculation of net income for Medea (Amounts in £) Without Jason With Jason Gross monthly income for first six months (£2060*6) 12360 Gross monthly income for last six months ((£2060+2%*2060)*6) 12607.2 Total gross income (24967-2+1750*12) 24967.2 45967.2 Less: Expenses yearly council tax 1500 2000 yearly utility bills (£300*4) 1200 1440 food expenses for the year (£90*52) 4680 9360 leisure and gift for the year (£60*12) 720 1080 transport cost for the year (£30*52) 1560 1560 rent expense for the year (£900*12) 10800 10800 Childcare expenses (£130*48)   6240 Total expenses 20460 32480 Net income for the year before tax and NI deductions 4507.2 13487.2 Less: Tax and NI deductions for the year - 1361.2 Net income for the year after tax and NI deductions 4507.2 12126 This alternative has a very positive impact on the financial position of Medea. Her yearly income increases by almost three times while the monthly cash flow improves a little less than 5 times. Through this support from her boyfriend, she is now able to finance her bicycle that was desperately needed by her in order to save her commuting costs. Comparing the above table for incomes with and without Jason (and Argo), we can see that the gross income increases by almost double of Medea’s individual income. Despite this significant increase in the income, all the expenses could increase only by smaller amounts except food expenses which show an increase of double the amount that was when Medea was alone. This relatively less increase in total expenses compared to the increase in the total gross income results in a considerable increase in the net income for the year. Similarly, the cash flows conditions also get better considerably and now Medea has monthly cash almost 5 times of what she had before support from her boyfriend Jason. Without Jason’s support it was not possible for her to finance her bicycle and save commuting cost but now she has 1640 Euros on average after paying for all her expenses which enables her to buy the desired bicycle even if costs her the highest expected price of 600 Euros. Question 2 a) Before any changes to the date given for option A, the use of saving and borrowing calculator (the money advice service, 2014) for that unchanged data gives us the following results: Monthly repayment: £676 Number of repayments: 120 Total Amount paid: £81075 Total interest paid: £21075 Now, when we assume that Polly chooses for option A and also that the interest rate remains constant throughout the period of mortgage; using the saving and borrowing calculator, we arrive at the following results: Monthly repayment: £755 Number of repayments: 120 Total Amount paid: £90534 Total interest paid: £23534 Comparing these two results, we can see that monthly mortgage repayments will increase for Polly by £79. b) It is quite obvious that if the mortgage period and interest rate remain constant then increase in principal amount will increase the amount of total interest to be paid for the mortgage term also. Same is the case here, using the same saving and borrowing calculator and keeping other variables constant, an increase in principal amount from £60000 to £ 67000 increases the total interest to be paid on this amount from £21075 to £23534. Choosing this option, now Polly will have to pay £2459 more than what was to be paid by her on the mortgage if option A was not the choice. If Polly chooses to pay off using her credit card loan at £200 per month with £3000 ready in hand, using the savings calculator (the money advice services, 2014) we can see two different results. These are: If the amount is taxable, she will have to pay it for a year and three months (15 months) while she will be required to pay the amount for a year and two months (14 months) if the amount is tax free. In the given case we assume that the amount is tax free for her and therefore she will have to pay this amount consistently for a year and two months (i-e 14 months). Monthly payment Repayment period Total interest paid Option A £79 120 months £2459 Option B £635.8333333 36 months £1890 Option C £200 14 months £700 Advantages of one option over the others Option A: This option is better than the other two due to its repayment amount for the month. The monthly payment for the insulation portion of the mortgage is very little compared to the other options. Polly will be paying £79 per month only if she opts for extending the size of her mortgage instead of paying £635 or £200 in case of choosing other options. Option B: Using this option, Polly can avail the advantage to complete the payments in a significantly short period even without paying her ready cash savings. Option C: This is the most suitable option for Polly regarding the amount of interest charges and payment period. Both the payment period and interest charges for this option are very low compared to the other options available. Disadvantages of one option compared to the other Option A: This option will require Polly to pay for an extremely long period. She will bear the difficulty to pay the monthly mortgage installments for a period of ten years which is a very long period to bear. Option B: This is not a good option to choose as it bears a higher interest charge as well as high amount of monthly payments required to be paid for the insulation charges. Option C: This option has no serious drawback as it bears a very low interest charge as well as a low monthly installment. However, the ready cash savings that were on hand and could be used for other purposes would be required to be paid in this option. Since, Polly has £3000 of savings, choosing this will require her to pay the same and then avail a low monthly pay and low interest charge. Risks and costs of Insulating Building Insulation of our houses is among the most important components of our house construction. It highly affects the energy costs. Heat flows naturally to a cool space from a warm space, and our homes greatly suffer from such transfer. In the winter, warm air will move from the inside to the outside making us cold. Similarly, in the summer, hot air will moves to the inside from the outside making it uncomfortably warm. To overcome these problems, we generally insulate our homes. Insulation helps us avoid high costs of the hard work by those seasonal equipments used to avoid unfavorable conditions. But insulation, too, has some drawbacks that are expected to affect the costs and risks associated with Polly’s house. Some of these are discussed below. Wall insulation is known to affect the performance of solid wall and in some cases can either create new moisture-related problems or exacerbate existing ones. Particular care needs to be assured while adding insulation to those walls which have high moisture content. Regarding fiberglass insulation, it is said that fiberglass are sometimes negatively referred to as the asbestos of the 20th century or "man-made asbestos". It is considered dangerous to the same extent as asbestos. Research on the inhalation of fiberglass has arrived to many conclusions. A 1970’s study on rats quotes that "fibrous glass of small diameter is a potent carcinogen." (John Fuller) Conclusion All this essay is about is to know how a person can choose from different options available to him in his life. Weather it is to finance a small equipment of need or a large property to live in, due care is needed in considering all the options available and have knowledge of their projections in future so that the most beneficial decision is taken. References the money advice service, (2014) Loan calculator. Retrieved May 5, 2014 from https://www.moneyadviceservice.org.uk/en/tools/loan-calculator the money advice services, (2014) Saving calculator. Retrieved May 5, 2014 from https://www.moneyadviceservice.org.uk/en/tools/savings-calculator John Fuller, (2012) Is insulation dangerous? Retrieved May 5, 2014 from http://home.howstuffworks.com/home-improvement/household-safety/tips/dangerous-insulation.htm Read More