2. Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Tom is willing to use the annual investment rate that predicted a 30-year, $1,000,000 portfolio in part 1. Show how to simulate Toms 30-year financial plan. Use results from the simulation model to comment on the uncertainty associated with Tom reaching the 30-year, $1,000,000 goal. Discuss the advantages of repeating the simulation numerous times.

(Kindly provide the answer for #2 with showing formulas).

Case Problem 1 TRI-STATE CORPORATION What will your portfolio be worth in 10 years? In 20 years? When you stop working The Human Resources Department at Tri-State Corporation was asked to develop a finan cial planning model that would help employees address these questions. Tom Gifford was asked to lead this effort and decided to begin by developing a financial plan for himself Tom has a degree in business and, at the age of 25, is making 534,000 per year. After two years of contributions to his company's retirement program and the receipt of a small in heritance, Tom has accumulated a portfolio valued at $14.500. Tom plans to work 30 more years and hopes to accumulate a portfolio valued at $1.000.000. Can he do it? Tom began with a few assumptions about his future salary, his new investment con- tributions, and his portfolio growth rate. He assumed 5% annual salary growth rate as rea- sonable and wanted to make new investment contributions at 49 of his salary. After some research on historical stock market performance, Tom decided that a 10% annual portfolio growth rate was reasonable. Using these assumptions, Tom developed the Excel worksheet shown in Figure 12.18. Tom's specific situation and his assumptions are in the top portion of the worksheet (cells D3:08). The worksheet provides a financial plan for the next five years. In computing the portfolio earnings for a given year. Tom assumed that his new investment contribution would occur evenly throughout the year, and thus half of the new investment could be included in the computation of the portfolio earnings for the year. Using Figure 12.18, we see that at age 29. Tom is projected to have a portfolio valued at $32.898. Tom's plan was to use this worksheet as a template to develop financial plans for the company's employees. The assumptions in cells D3:08 would be different for each employee, and rows would be added to the worksheet to reflect the number of years appro- priate for each employee. After adding another 25 rows to the worksheet, Tom found that he could expect to have a portfolio of $627.937 after 30 years. Tom then took his results to show his boss, Kate Riegle. FIGURE 12.18 FINANCIAL PLANNING WORKSHEET FOR TOM GIFFORD A B C 1 Financial Analysis - Portfolio Projection file 25 S34.000 $14.500 5% 40 10% 3 Age 4 Current Salary 5 Current Portfolio 6 Annual Salary Growth Rate 7 Annual Investment Rate 8 Annual Portfolio Growth Rate 9 10 Beginning 11 Year Age Portfolio 121 1 2 5 14.500 1312 26 17.378 143 27 20.615 15 4 28 2 4.251 16 5 29 28.329 Salary 34.000 35.700 37.485 39.359 41.327 New Investment 1.360 428 1.499 1.574 1 653 Portfolio Ending Farming Portfolio 1518 17.378 .80920.615 2.136 24.251 2.504 28,329 2.916 32.898 Case Problem 2 Harbor Dunes Golf Course 593 s progress, she voiced several criticisms. One n in the annual salary growth rate from Although Kate was pleased with Tom's progress, she voiced of the criticisms was the assumption of a constant annual salary that most employees experience some variation in the annual salary go Prion of a constant annual salary growth rate. She noted year to year. In addition, she pointed out that the constant annual portion was unrealistic and that the actual growth rate would vary considerably year. She further suggested that a simulation model for the portfolio project allow Tom to account for the random variability in the salary growth rate al folio growth rate. After some research, Tom and Kate decided to assume that the annual salary sro rate would vary from 0% to 10% and that a uniform probability distribution would pro vide a realistic approximation. Tri-State's accounting firm suggested that the annu portfolio growth rate could be approximated by a normal probability distribution with a mean of 10% and a standard deviation of 5%. With this information. Tom set off to develop a simulation model that could be used by the company's employees for financial would vary considerably from year to nodel for the portfolio projection might ability in the salary growth rate and the port- planning. Managerial Report Play the role of Tom Gifford and develop a simulation model for financial planning. Write a report for Tom's boss and, at a minimum, include the following: 1. Without considering the random variability in growth rates, extend the worksheet in Figure 12.18 to 30 years. Confirm that by using the constant annual salary growth rate and the constant annual portfolio growth rate, Tom can expect to have a 30-year portfolio of $627,937. What would Tom's annual investment rate have to increase to in order for his portfolio to reach a 30-year, $1,000,000 goal? 2. Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Tom is willing to use the annual investment rate that predicted a 30-year, $1,000,000 portfolio in part 1. Show how to simulate Tom's 30-year financial plan. Use results from the simulation model to comment on the uncertainty associated with Tom reaching the 30-year. $1.000.000 goal. Discuss the advantages of repeating the simulation numerous times 3. What recommendations do you have for employees with a current profile similar to Tom's after seeing the impact of the uncertainty in the a al salary growth rate and the annual portfolio growth rate? 4. Assume that Tom is willing to consider working 35 years instead of 30 ye What is your assessment of this strategy if Tom's goal is to have a portfolio worth $1,000,000? 5. Discuss how the financial planning model developed for Tom Gifford can as a template to develop a financial plan for any of the company's emple Case Problem 1 TRI-STATE CORPORATION What will your portfolio be worth in 10 years? In 20 years? When you stop working The Human Resources Department at Tri-State Corporation was asked to develop a finan cial planning model that would help employees address these questions. Tom Gifford was asked to lead this effort and decided to begin by developing a financial plan for himself Tom has a degree in business and, at the age of 25, is making 534,000 per year. After two years of contributions to his company's retirement program and the receipt of a small in heritance, Tom has accumulated a portfolio valued at $14.500. Tom plans to work 30 more years and hopes to accumulate a portfolio valued at $1.000.000. Can he do it? Tom began with a few assumptions about his future salary, his new investment con- tributions, and his portfolio growth rate. He assumed 5% annual salary growth rate as rea- sonable and wanted to make new investment contributions at 49 of his salary. After some research on historical stock market performance, Tom decided that a 10% annual portfolio growth rate was reasonable. Using these assumptions, Tom developed the Excel worksheet shown in Figure 12.18. Tom's specific situation and his assumptions are in the top portion of the worksheet (cells D3:08). The worksheet provides a financial plan for the next five years. In computing the portfolio earnings for a given year. Tom assumed that his new investment contribution would occur evenly throughout the year, and thus half of the new investment could be included in the computation of the portfolio earnings for the year. Using Figure 12.18, we see that at age 29. Tom is projected to have a portfolio valued at $32.898. Tom's plan was to use this worksheet as a template to develop financial plans for the company's employees. The assumptions in cells D3:08 would be different for each employee, and rows would be added to the worksheet to reflect the number of years appro- priate for each employee. After adding another 25 rows to the worksheet, Tom found that he could expect to have a portfolio of $627.937 after 30 years. Tom then took his results to show his boss, Kate Riegle. FIGURE 12.18 FINANCIAL PLANNING WORKSHEET FOR TOM GIFFORD A B C 1 Financial Analysis - Portfolio Projection file 25 S34.000 $14.500 5% 40 10% 3 Age 4 Current Salary 5 Current Portfolio 6 Annual Salary Growth Rate 7 Annual Investment Rate 8 Annual Portfolio Growth Rate 9 10 Beginning 11 Year Age Portfolio 121 1 2 5 14.500 1312 26 17.378 143 27 20.615 15 4 28 2 4.251 16 5 29 28.329 Salary 34.000 35.700 37.485 39.359 41.327 New Investment 1.360 428 1.499 1.574 1 653 Portfolio Ending Farming Portfolio 1518 17.378 .80920.615 2.136 24.251 2.504 28,329 2.916 32.898 Case Problem 2 Harbor Dunes Golf Course 593 s progress, she voiced several criticisms. One n in the annual salary growth rate from Although Kate was pleased with Tom's progress, she voiced of the criticisms was the assumption of a constant annual salary that most employees experience some variation in the annual salary go Prion of a constant annual salary growth rate. She noted year to year. In addition, she pointed out that the constant annual portion was unrealistic and that the actual growth rate would vary considerably year. She further suggested that a simulation model for the portfolio project allow Tom to account for the random variability in the salary growth rate al folio growth rate. After some research, Tom and Kate decided to assume that the annual salary sro rate would vary from 0% to 10% and that a uniform probability distribution would pro vide a realistic approximation. Tri-State's accounting firm suggested that the annu portfolio growth rate could be approximated by a normal probability distribution with a mean of 10% and a standard deviation of 5%. With this information. Tom set off to develop a simulation model that could be used by the company's employees for financial would vary considerably from year to nodel for the portfolio projection might ability in the salary growth rate and the port- planning. Managerial Report Play the role of Tom Gifford and develop a simulation model for financial planning. Write a report for Tom's boss and, at a minimum, include the following: 1. Without considering the random variability in growth rates, extend the worksheet in Figure 12.18 to 30 years. Confirm that by using the constant annual salary growth rate and the constant annual portfolio growth rate, Tom can expect to have a 30-year portfolio of $627,937. What would Tom's annual investment rate have to increase to in order for his portfolio to reach a 30-year, $1,000,000 goal? 2. Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Tom is willing to use the annual investment rate that predicted a 30-year, $1,000,000 portfolio in part 1. Show how to simulate Tom's 30-year financial plan. Use results from the simulation model to comment on the uncertainty associated with Tom reaching the 30-year. $1.000.000 goal. Discuss the advantages of repeating the simulation numerous times 3. What recommendations do you have for employees with a current profile similar to Tom's after seeing the impact of the uncertainty in the a al salary growth rate and the annual portfolio growth rate? 4. Assume that Tom is willing to consider working 35 years instead of 30 ye What is your assessment of this strategy if Tom's goal is to have a portfolio worth $1,000,000? 5. Discuss how the financial planning model developed for Tom Gifford can as a template to develop a financial plan for any of the company's emple