Like many married couples, Morgan and Thomas Jensen are trying their best to save for two important investment objectives: (1) an education fund to put their two children through college; and (2) a retirement nest egg for themselves. They want to set aside $100,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Morgan and Thomas have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Jensens both hope to retire in 20 years, when they reach age 65. Both Morgan and Thomas work, and together, they currently earn about $90,000 a year.

The Jensens started a college fund some years ago by investing $6,000 a year in bank CDs. That fund is now worth $65,000. They also have $50,000 that they received from an inheritance invested in several mutual funds and another $20,000 in a tax-sheltered retirement account. Morgan and Thomas believe that they’ll be able to continue putting away $6,000 a year for the next 20 years. In fact, Morgan thinks they’ll be able to put away even more, particularly after the children are out of school. The Jensens are fairly conservative investors and feel they can probably earn about 6 percent on their money.

1. Use Worksheet 11.1 to determine whether the Jensens have enough money right now to meet their children’s educational needs. That is, will the $65,000 they’ve accumulated so far be enough to put their children through school, given they can invest their money at 6 percent? Remember, they want to have $100,000 set aside for each child by the time each one starts college.

2. Regarding their retirement nest egg, assume that no additions are made to either the $50,000 they now have in mutual funds or to the $20,000 in the retirement account. How much would these investments be worth in 20 years, given that they can earn 6 percent?

3. Now, if the Jensens can invest $6,000 a year for the next 20 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given their 6 percent rate of return?

4. How do you think the Jensens are doing with regard to meeting their twin investment objectives? Explain.

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Worksheet 11.1, Chapter 11, Exercise1 Part a and b Financial goal: 1. Targeted Financial Goal (see Note 1) 2. Projected Average Return on Investments A. Finding a Lump Sum Investment: 3. Future Value Factor, from Appendix A, computed here . based on return on investment of 4. Required Lump Sum Investment . line 1 + line 3 B. Making a Series of Investments over Time: 5. Amount of Initial Investment, if any (see Note 2) 6. Future Value Factor, from Appendix A, computed here • based on return on investment of 7. Terminal Value of Initial Investment Determining Amount of Investment Capital Needed Invest lump sum to end up with $50,000 in 8 years 8 years to target date and a projected average 10 % • line 5 x line 6 8. Balance to Come from Savings Plan line 1 - line 7 Note 1: 8 years of target date and a projected average 10% 9. Future Value Annuity Factor, from Appendix B, computed here • based on Note 2: 8 years to target date and a projected average 10 % 10. Series of Annual Investments Required over Time line 8+ line 9 return on investment of $ $ $ $ The "targeted financial goal" is the amount of money you want to accumulate by some target date in the future. If you're starting from scratch-i.e., there is no initial investment-enter zero on line 5, skip lines 6 and 7, and then use the total targeted financial goal (from line 1) as the amount to be funded from a savings plan; now proceed with the rest of the worksheet. 50,000.00 10 % 2.144 23,325.37 2.144 50,000.00 11.44 4,372.00 Worksheet 11.1, Chapter 11, Exercise 1 Part c Financial goal: 1. Targeted Financial Goal (see Note 1) 2. Projected Average Return on Investments A. Finding a Lump Sum Investment: 3. Future Value Factor, from Appendix A, computed here • based on 8 years to target date and a projected average return on investment of 10 % 4. Required Lump Sum Investment line 1 + line 3 . Determining Amount of Investment Capital Needed Invest lump sum to end up with $50,000 in 8 years B. Making a Series of Investments over Time: 5. Amount of Initial Investment, if any (see Note 2) 6. Future Value Factor, from Appendix A, computed here based on 8 years of target date and a projected average return on investment of • 10 % 7. Terminal Value of Initial Investment • line 5x line 6 8. Balance to Come from Savings Plan line 1- line 7 . 9. Future Value Annuity Factor, from Appendix B, computed here • based on 8 years to target date and a projected average return on investment of 10 % 10. Series of Annual Investments Required over Time line 8+ line 9 Note 1: Note 2: $ $ $ $ $ The "targeted financial goal" is the amount of money you want to accumulate by some target date in the future. If you're starting from scratch-i.e., there is no initial investment-enter zero on line 5, skip lines 6 and 7, and then use the total targeted financial goal (from line 1) as the amount to be funded from a savings plan; now proceed with the rest of the worksheet. 50,000.00 10 % 2.144 23,320.90 10,000.00 2.144 21,440.00 28,560.00 11.44 2,497.00