Using spare cash without exhausting the reserve
Series X-A case study · set 3, case 1 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
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The case · stays here for all 5 questions
Neel has total assets of ₹9,00,000, including ₹1,50,000 in cash. His liabilities are a ₹60,000 credit-card balance charging 24% annually and a ₹2,40,000 personal loan charging 10% annually. For this exercise both debts allow immediate principal repayment without fees, and interest savings are calculated using simple annual rates. Neel must preserve ₹50,000 cash for emergencies. He wants to use the remaining available cash to maximise annual interest saved, with no investment alternative or tax effect. Assume minimum required payments are otherwise met. Compare net worth immediately before and after repayment, before any interest savings accrue.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Neel has total assets of ₹9,00,000, including ₹1,50,000 in cash. His liabilities are a ₹60,000 credit-card balance charging 24% annually and a ₹2,40,000 personal loan charging 10% annually. For this exercise both debts allow immediate principal repayment without fees, and interest savings are calculated using simple annual rates. Neel must preserve ₹50,000 cash for emergencies. He wants to use the remaining available cash to maximise annual interest saved, with no investment alternative or tax effect. Assume minimum required payments are otherwise met. Compare net worth immediately before and after repayment, before any interest savings accrue.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1How much cash is available for repayment after protecting the reserve?
Option A. ₹1,50,000
Why it is wrong: This uses the protected emergency reserve.
Option B. ₹50,000
Why it is wrong: This is the reserve, not the remaining cash.
Option C. ₹1,00,000 — Correct answer
Option D. ₹3,00,000
Why it is wrong: This is total debt, not cash available.
Answer: C. ₹1,50,000 − ₹50,000 = ₹1,00,000. Remember: A debt-repayment plan must preserve binding liquidity needs.
Hint, shown before you answer in practice mode: Subtract the reserve from available cash.
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Q2How should the available ₹1,00,000 be split to maximise annual interest saved under these assumptions?
Option A. Repay ₹1,00,000 of the personal loan only.
Why it is wrong: This leaves the more expensive 24% debt outstanding.
Option B. Repay the ₹60,000 card balance and ₹40,000 of the personal loan. — Correct answer
Option C. Retain all cash because repayment cannot save interest.
Why it is wrong: Both stated debts charge interest that can be avoided.
Option D. Repay ₹50,000 of each debt.
Why it is wrong: This leaves ₹10,000 of the expensive card debt unpaid.
Answer: B. First clear the ₹60,000 debt at 24%, then use the remaining ₹40,000 on the 10% loan. Remember: When other terms are equal, higher-cost debt offers greater interest savings per rupee repaid.
Hint, shown before you answer in practice mode: Each repaid rupee saves more on the higher-rate debt.
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Q3What annual interest saving follows that split?
Option A. ₹14,400
Why it is wrong: This excludes savings on the personal-loan repayment.
Option B. ₹24,000
Why it is wrong: This assumes all ₹1,00,000 can repay debt at 24%.
Option C. ₹10,000
Why it is wrong: This assumes every repaid rupee saves only 10%.
Option D. ₹18,400 — Correct answer
Answer: D. ₹60,000 × 24% + ₹40,000 × 10% = ₹14,400 + ₹4,000 = ₹18,400. Remember: A repayment’s benefit follows the rate on the debt actually reduced.
Hint, shown before you answer in practice mode: Calculate savings on each amount at its own rate.
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Q4What is net worth before repayment?
Option A. ₹7,50,000
Why it is wrong: This deducts cash rather than liabilities.
Option B. ₹6,00,000 — Correct answer
Option C. ₹9,00,000
Why it is wrong: This ignores liabilities.
Option D. ₹3,00,000
Why it is wrong: This is the debt total.
Answer: B. ₹9,00,000 − ₹60,000 − ₹2,40,000 = ₹6,00,000. Remember: Cash is an asset, while outstanding debt is a liability.
Hint, shown before you answer in practice mode: Subtract both liabilities from all assets.
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Q5What happens to net worth immediately after the ₹1,00,000 principal repayment?
Option A. It becomes equal to the emergency reserve.
Why it is wrong: Net worth includes all assets and liabilities, not just cash.
Option B. It falls immediately to ₹5,00,000.
Why it is wrong: This counts the cash outflow without reducing debt.
Option C. It rises immediately to ₹7,00,000.
Why it is wrong: This counts debt reduction without the cash used.
Option D. It remains ₹6,00,000 because assets and liabilities both fall by ₹1,00,000. — Correct answer
Answer: D. Assets become ₹8,00,000 and liabilities ₹2,00,000, leaving net worth unchanged at ₹6,00,000. Future interest savings can improve future wealth. Remember: Principal repayment rearranges the balance sheet. Avoided interest is a later benefit.
Hint, shown before you answer in practice mode: Track both sides of the personal balance sheet.
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Choosing between money today and staged payments
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