Juanita Torres is 35-years old and lately has been working with her financial planner. She is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Juanita Torres is 35-years old and lately has been working with her financial planner. She is attempting develop a long-term savings and investment program. She has been thinking about all the major expenses that she is likely to incur over the next 50 years as she prepares for retirement and some major life changes for her and her children. Here of some of the important spending and income items that she and the financial planner have considered: Homework #1 - Parts A-C 1. She expects to be able to retire 30 years from now and plans on spending $175,000 in her first year of retirement. O O Assume the first payment is coming 31 years from today and the last one occurring 50 years from today. Her financial planner has told her to expect the spending to grow 2% per year in nominal dollars. 2. She has two children and needs to fund their college educations O Payments will begin 20 years from today (estimated to be $55,000 per year for the first child) and 22 years from today (at $58,000 per year for the second child). She has an arrangement that locks in those expected college expenses, so they don't grow once her children start school. 3. She intends to buy a winter vacation home for $800,000, 12 years from today. At that time she plans to make a $200,000 down payment. O O She will finance the rest of the purchase with a 15-year mortgage with annual payments at a projected interest rate of 5%. 4. She wants to leave her two children $450,000 each, 50 years from today 5. She desires to fund an endowment for her alma mater to help needy finance students O The payments will begin 36 years from today with a payment of $35,000 and grow at a rate of 4% annually in perpetuity in nominal terms 6. She just found out that her rich uncle has set up a trust for her O She will receive fixed $30,000 payments, beginning five years from today. These payments will come every other year through year 13 (five payments in all). 7. She will begin drawing Social Security at the end of the year that she turns age 70. Her initial payment will be $50,000 per year. Social Security grows with the inflation rate. Other Assumptions 1. Juanita can earn 7.5% (nominal) annually on her investments 2. The inflation rate over the entire period is 3% 3. Ignore any tax implications of her financial decisions (a bad idea) Model Outputs Part A 1. How much will Josephine need if she were to put aside one lump sum amount today in addition to her existing savings? Perform the calculation in two ways: a. Calculate the present value of each cash flow separately and sum those calculations over all the cash flows. b. Calculate the combined present value of each year's cash flows and sum the amounts. Show that the result is the same as part a. 2. How much will Josephine need to save, in equal amounts for the next 30 years, starting one year from today, to be able to meet the cash flow needs? Part B Juanita is rightly concerned that her retirement spending needs might vary and that the return on her investments is highly uncertain. She is interested in how the interplay of those two variables might impact her required annual savings. Calculate that annual savings required in Part 2 at nominal interest rates of 5-10% increasing in 1% increments and retirement spending amounts of $125,000 - $225,000 increasing in $25,000 increments. Using Conditional Formatting, highlight in green fill those combinations of investment returns and retirement spending that result in required savings less than the currently projected amount in Part A. Part C Juanita has done some analysis of her annual spending on living essentials and has some concerns about how much she can set aside each year. Her financial planner has suggested boosting the expected return on her investments by taking on more portfolio risk. Holding the inflation rate constant at 3%, what nominal rate does Juanita need to earn in order meet her long-term financial plan with annual savings limited to $40,000 a year? Juanita Torres is 35-years old and lately has been working with her financial planner. She is attempting develop a long-term savings and investment program. She has been thinking about all the major expenses that she is likely to incur over the next 50 years as she prepares for retirement and some major life changes for her and her children. Here of some of the important spending and income items that she and the financial planner have considered: Homework #1 - Parts A-C 1. She expects to be able to retire 30 years from now and plans on spending $175,000 in her first year of retirement. O O Assume the first payment is coming 31 years from today and the last one occurring 50 years from today. Her financial planner has told her to expect the spending to grow 2% per year in nominal dollars. 2. She has two children and needs to fund their college educations O Payments will begin 20 years from today (estimated to be $55,000 per year for the first child) and 22 years from today (at $58,000 per year for the second child). She has an arrangement that locks in those expected college expenses, so they don't grow once her children start school. 3. She intends to buy a winter vacation home for $800,000, 12 years from today. At that time she plans to make a $200,000 down payment. O O She will finance the rest of the purchase with a 15-year mortgage with annual payments at a projected interest rate of 5%. 4. She wants to leave her two children $450,000 each, 50 years from today 5. She desires to fund an endowment for her alma mater to help needy finance students O The payments will begin 36 years from today with a payment of $35,000 and grow at a rate of 4% annually in perpetuity in nominal terms 6. She just found out that her rich uncle has set up a trust for her O She will receive fixed $30,000 payments, beginning five years from today. These payments will come every other year through year 13 (five payments in all). 7. She will begin drawing Social Security at the end of the year that she turns age 70. Her initial payment will be $50,000 per year. Social Security grows with the inflation rate. Other Assumptions 1. Juanita can earn 7.5% (nominal) annually on her investments 2. The inflation rate over the entire period is 3% 3. Ignore any tax implications of her financial decisions (a bad idea) Model Outputs Part A 1. How much will Josephine need if she were to put aside one lump sum amount today in addition to her existing savings? Perform the calculation in two ways: a. Calculate the present value of each cash flow separately and sum those calculations over all the cash flows. b. Calculate the combined present value of each year's cash flows and sum the amounts. Show that the result is the same as part a. 2. How much will Josephine need to save, in equal amounts for the next 30 years, starting one year from today, to be able to meet the cash flow needs? Part B Juanita is rightly concerned that her retirement spending needs might vary and that the return on her investments is highly uncertain. She is interested in how the interplay of those two variables might impact her required annual savings. Calculate that annual savings required in Part 2 at nominal interest rates of 5-10% increasing in 1% increments and retirement spending amounts of $125,000 - $225,000 increasing in $25,000 increments. Using Conditional Formatting, highlight in green fill those combinations of investment returns and retirement spending that result in required savings less than the currently projected amount in Part A. Part C Juanita has done some analysis of her annual spending on living essentials and has some concerns about how much she can set aside each year. Her financial planner has suggested boosting the expected return on her investments by taking on more portfolio risk. Holding the inflation rate constant at 3%, what nominal rate does Juanita need to earn in order meet her long-term financial plan with annual savings limited to $40,000 a year?
Expert Answer:
Answer rating: 100% (QA)
Understood Here is the complete answer for all parts Part A 1 Calculating the present value of each cash flow separately and summing them Retirement S... View the full answer
Related Book For
Ethics Theory and Contemporary Issues
ISBN: 978-1305958678
9th edition
Authors: Barbara MacKinnon, Andrew Fiala
Posted Date:
Students also viewed these finance questions
-
3. V Corporation manufactures rattan furniture sets for export and uses the job order cost system in accounting for its cost. You obtained from the corporation's books and records the following...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Metro builds and operates traditional shopping malls. It holds a $25 million deferred tax asset relating to credit carryforwards at the state, local, and Federal levels. No valuation allowances...
-
Pro Leather, a supplier to sporting goods manufacturers, has a current ratio of 0.90, based on current assets of $450,000 and current liabilities of $500,000. How, if at all, will a $100,000 purchase...
-
Dulaney's Stores has posted the following yearly earnings and expenses. Click the icon to view the yearly data. a. Dulaney's current profit margin is 11.9 %. (Enter your response rounded to one...
-
What are some potential roles for advisory councils? How can organizations use these groups effectively?
-
Valdillas Music Store acquired land and an old building in exchange for 50,000 shares of its common stock, par $0.50, and cash of $80,000. The auditor ascertains that the companys stock was selling...
-
A study of depression and exercise was conducted. A total of 5 groups were used: each group differs by the extent to which group members exercise. A depression rating (scale: 1- 100, a continuous...
-
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250...
-
Consider the extent to which that following promises are enforceable in English law: 1. Grace informs the police that her diamond necklace has been stolen. PC 2112 apprehends the thief and returns...
-
1 Describes the relationship between nominal returns, real returns and inflation 2 The annual coupon payment dividend divided by the current bond price 3 When a company buys back its own shares in an...
-
Using Table 11-1, compute the amount of compound interest (in $) earned in 1 year and the annual percentage yield (APY) for the investment. Compound Interest Earned in 1 Year Annual Percentage Yield...
-
Currently, Teewinot sells 1,500,000 per year, but they expect demand to increase by 10% each year for the next 4 years then drop down to 3% growth in volume for the remaining life of the machine....
-
In a certain chemical processing plant, a liquid chemical element is used in a manufacturing process. Said chemical element is stored in three different tanks. A level sensor in each tank generates a...
-
Selected comparative financial statements of Korbin Company follow. Sales KORBIN COMPANY Comparative Income Statements For Years Ended December 31 2021 2020 $ 460,845 $ 353,045 Cost of goods sold...
-
In your Industry or Organization, What kind of Project Team Structure is the most acceptable and Why? Project Team Structures Functional Matrix (Weak, Balanced, Strong) Projectized Answer making...
-
The outer loop controls the number of students. Note that the inner loop of this program is always executed exactly three times, once for each day of the long weekend. Modify the code so that the...
-
In 1995, a woman who was pregnant and refused to discontinue her use of cocaine was reported by her obstetrician to child-abuse authorities. They obtained an order from the juvenile court to take...
-
Madison is a successful businessperson who has become convinced that she ought to give a substantial amount of her earnings to help those in extreme poverty in the developing world. Her brother,...
-
Dr. Kaur has been asked to serve as a consultant for the state as it is revising its protocol for use of lethal injection in executions. Dr. Kaur is not personally opposed to the death penalty, but...
-
It frequently happens that a table with data needs to be restructured before the data can be analyzed using standard statistical software. As an example, consider the test scores in Table 1. 3 of 5...
-
Hospitality Inc. (HI) is a holding company that has wholly owned interests in the travel and entertainment industry. HI is listed on the Toronto Stock Exchange and is subject to the reporting...
-
Create a similar barplot as in Figure 1. 5, but now plot the corresponding proportions of males and females in each of the three situation categories. That is, the heights of the bars should sum up...
Study smarter with the SolutionInn App