BANK 1002 Personal Finance Assessment 1 Case Study Information for both Continuous Assessment: Part 1 and Part 2 Current situation Teressa is a 56-year-old Highly Accomplished Teacher with 31 years' full-time experience in secondary education. Teressa had a gross income from employment of $114,978 for the 2020-2021 financial year. Teressa is a member of a teacher's union and paid $1,149.78 of her wages in union fees for the 2020-2021 year. Teressa feels strongly about supporting charity and has accumulated receipts from donations of $395 for 2020-2021. Teressa's assets include her two-bedroom inner-city apartment, valued at $715,000, a car valued at $42,500, furniture and other personal effects valued at $97,500, a transaction account with a balance of $14,300, earning $71.50 in interest for the 2020-2021 financial year, a term deposit account with a balance of $12,500, earning $106.25 in interest for the 2020-2021 financial year, and a superannuation account balance of $535,625. Under her industrial award Teressa contributes a required seven per cent of her annual salary towards superannuation, which also receives a contribution equivalent to 12.5 per cent of her salary from her employer, the state government (also the fund sponsor). Teressa's superannuation provides her with life insurance of $320,000, included as part of the term life and total and permanent disability cover provided within the fund. The beneficiary of Teressa's superannuation and insurance policies is her 79-year-old mother, who also lives with Teressa. Teressa's mother is in receipt of a full aged pension, which is her only source of income. Teressa's mother has limited assets, these being a small amount of furniture and her own personal effects (valued at $47,000). Teressa wishes for her mother to have a lump sum of $20,000 to cover her (Teressa's) funeral and any legal costs in the case of her death, and an emergency fund of $25,000. She also wishes for her mother to be able to remain in the apartment until such time as she needs to sell this to fund aged-care accommodation. Francesca assumes that the sale value of the property will be enough to fund this accommodation when needed. Finally, Teressa has estimated that, in the case of her death, her mother will need a lump sum that will allow her to draw approximately $16,500 per year (in excess of her pension) to cover costs such as strata fees, council rates, home contents insurance, and property repairs and maintenance. Teressa's liabilities include a mortgage against her apartment of $285,000, with 15 years remaining term and current monthly repayments of $2,050.03, a car loan on which she owes a remaining $8,300 over the next 36 months with monthly repayments set at $265.87, and a credit card which currently has a balance of $315.45. As of the end of 2020-2021, and prior to payment of her net taxes and levies, Teressa also had a remaining HELP debt of $5,325, this being the last of the debt incurred from completing her Master of Teaching studies. To get to and from the workplace, Teressa incurs operating, registration and comprehensive insurance expenses on her car of $3,350 per year (of which insurance is $1495). Teressa estimates that 40 per cent of her mobile phone and Internet expenses (which total $1,460 per year) are work related. Teressa uses her home office for the equivalent of at least two days a week to prepare teaching materials and classes and estimates that 15 per cent of her electricity expenses (which total $2,875 per year) are work related. Teressa's other major expenses are comprised of Strata fees ($1,875 per quarter), council 1 rates ($1,825 per year), water bill ($1,120 per year), gas charges ($525 per year), groceries and household products ($315 per week), clothing ($3,430 per year), home contents insurance which provides her with $150,000 of contents cover ($815 per year), private health insurance ($3,095 per year), gym membership ($840 per year), medical and other health-related costs ($875 per year) and eating out and entertainment ($3,680 per year). Looking forward Under her industrial award Teressa will receive a salary increase of three per cent in 2021- 2022. Teressa expects her strata fees, council rates, water, gas, and insurance charges will increase by 3.25 per cent in 2021-2022, while her health insurance will increase by 4.5 per cent. Teressa expects all other of her existing expenses (except net taxes and levies) to be the same in 2021-22 as in 2020-2021. Teressa is considering borrowing $12,300 over seven years to buy a new compact SUV valued at $44,500 drive away and to repay the outstanding balance on her existing car loan. Teressa has been offered a trade-in value of $40,500 on her current vehicle. She believes that, with the lower registration, insurance, servicing, and fuel costs of a new, smaller vehicle, she will save approximately $875 a year on her vehicle operation expenses over each of the next 7 years. Teressa has been looking at the finance contracts available to her from alternative banks and credit unions. She has had the following annual interest rates and loan establishment fees quoted to her for a car loan (compounding and repayments are monthly): 7.35 per cent per annum, application and processing fee $150; 7.65 per cent per annum, application and processing fee $125; and 7.05 per cent per annum, application and processing fee $250. As mortgage interest rates have fallen since the time that Teressa took out her current variable rate mortgage, she has been looking at alternative mortgage loans with which to refinance. Teressa wishes to borrow the $285,000 that she still owes on her apartment over 20 years. Teressa has had the following interest rates and loan establishment fees quoted to her (repayments will monthly): 2.95 per cent per annum compounded monthly, application and processing fee $350 ; 2.57% per annum compounded monthly, application and processing fee $750; and 2.45% per annum compounded monthly, application and processing fee $1,050. As the loan to value ratio on her property is low, at approximately 40 per cent, no mortgage insurance will be required. Notes and assumptions 1. Teressa is not able to claim a tax deduction for her required superannuation contributions, given these, and the employer contributions, form part of her industrial award requirements. 2. Teressa's mother has a life expectancy of 92 years and is likely to live in the apartment until around age 85. 3. Teressa's mother's pension entitlement will not be affected by her receipt of benefits under Teressa's superannuation and life insurance policies. 4. As Teressa's Master of Teaching enrolment was in a government supported program, 2 she cannot claim the repayment of the HELP debt liability as an allowable deduction for self-education expenses and must repay her HELP debt at a rate appropriate to her income and level of debt. 5. Teressa has silver level hospital cover and a relatively high level of extras cover. As Teressa has both hospital and extras cover her policy satisfies the requirements to receive the private health insurance rebate. BANK 1002 Personal Finance - Assessment 1 - Problem Solving Exercise 1.2 Length and weighting: 1,000 words equivalent, 30% of course total marks Component of assessment scheme: Second of two continuous assessments for this course. Due date: 6 May 2022, 11:00 PM Assessing personal insurance needs; assessment of consumer credit alternatives. Assessment description In Continuous Assessment 1.2, you will focus on ideas and techniques introduced in Weeks 4, 5 and 6. You will show your understanding of the role of personal insurance in the personal financial plan, by analysing personal insurance needs. You will also apply your learnings on consumer credit and debt alternatives to the analysis of personal debt decisions. Assessment aims This assessment will develop your knowledge of the personal financial planning process and your analytical and practical skills, preparing you to complete Assessment 2: Personal Financial Plan. The ability to identify personal insurance needs, understand the role of debt within the personal financial plan, and undertake a consistent evaluation of the cost of credit alternatives are important tools in the personal financial planning process. By completing this assessment task, you will be able to: CO1. Demonstrate proficiency in the application of time value of money concepts and methods to personal financial management decisions. CO2. Evaluate borrowing and personal investment alternatives and their implications for the accumulation of personal wealth. CO3. Formulate and use personal financial budgets as devices for the planning and control of personal finances. CO4. Explain fundamental concepts related to risk and return and their relevance to personal investment planning and financial management decisions. CO5. Demonstrate Business School Enterprise Skills in the context of the Financial Planning discipline: i) Self-management (foundation level); and ii) Problem Solving (foundation level). Assessment criteria 1. Demonstrates clear ability to analyse and make informed personal financial decisions on the individual's insurance requirements given net assets, net income, and current position within the financial planning life cycle. 2. Demonstrates clear ability to evaluate personal credit alternatives, including construction and use of the effective rate of interest concept as a tool to compare these alternatives on a consistent basis. 3. Demonstrates critical and analytical thinking in identifying and utilising appropriate information from the case study. 4. Both the written responses to tasks/questions and any supporting Excel workbook calculations are organised and structured in a logical fashion. 5. The written responses evidence an understanding of both the context and purpose of the information being prepared for personal financial planning and decision making. 6. The written expression in the response of is of high quality (free from spelling, grammar, and other language errors). Assessment instructions Carefully read the Assessment 1 Case Study, and this assessment component's associated tasks/questions, ensuring that you note all relevant information. To determine the individual's insurance requirements, you should identify all relevant value and cash flow information. This will require that you use or prepare a personal: balance sheet; income and expenditure statement (personal cash flow budget); and budget (projected cash flow budget/statement). You should then determine the individual's (or family's) current position within the financial planning life cycle. Considering both the budgetary position and their lifecycle-based insurance requirements, make a personal financial recommendation on the types and level of insurance suited to the individual. To determine the individual's ability to utilise debt, you should identify all relevant value and cash flow information. This will require that you use or prepare a personal: balance sheet; income and expenditure statement (personal cash flow budget); and budget (projected cash flow budget/statement). You should also identify the individual's current position within the financial planning life cycle. When comparing debt alternatives (e.g., choices for mortgage products), you should ensure that you construct measures that allow you to compare each alternative on a consistent basis, inclusive of any fees and charges associated with each debt contract. Assessment advice and resources The activities for each topic will guide you through the key theoretical concepts and the analytical tools that you will require to complete this assessment. Draw on these, the textbook, and Excel resources to develop your responses. You will also find that the activities in each topic will guide you on how to present your assessment responses. Academic integrity Your responses to the assessment questions will need to draw on multiple sources, and these sources will need to be referenced appropriately. The style of referencing we expect you to use is UniSA Harvard referencing. Note that where a finance or financial planning assignment is comprised mainly of calculations it is no different from a written (e.g., essay) assignment. You must acknowledge, by appropriate references, all texts and sources that provided you with the formulae, etc., to do your calculations. Please be aware that your written work will be checked for plagiarism using text comparison software and held in a data base for future reference. Feedback Assessment feedback will be provided within 10 to 15 business days of submission of the assessment piece. Feedback will be provided in two forms: via a rubric identifying the level of performance of the student against the assessment criteria; and generic feedback in the form of a set of solution outlines (including, where relevant, simplified Excel-based solutions to calculations). Students should use both the specific and generic feedback to assess the quality of their submitted responses, and to determine where further study/review of course content is required to improve their performance prior to preparation of the project (personal financial plan). Required 1. Undertake a needs analysis of life insurance cover as of 30 June of the current financial year for the individual identified in the Assessment 1 Case Study. 2. What do you recommend with respect to the adequacy of the current life insurance cover of the individual identified in the Assessment 1 Case Study? 3. Do you have any other recommendations regarding insurance for the individual identified in the Assessment 1 Case Study? 4. With respect to any (each of the) loans being considered by the individual identified in the Assessment 1 Case Study a. What would be the monthly and annual payments? b. Which contract provides the more attractive effective interest rate? c. Would the 'best' loan evaluated improve the financial position of the individual identified in the Assessment 1 Case Study if they decide to take it (i.e., does it provide a cash flow improving alternative to the existing loan or other net benefit)? Show all your workings and state any assumptions that you have made in developing your 3 estimates (for any calculations that you undertake, this may best be demonstrated through careful construction and design of your Excel workbook, as outlined in the Appendix to Chapter 2 of the McKeown, Olynyk, Kerry, Ciancio, and La (2021) textbook)