Celestila Moonn a student doing internship at JPM Goldman, a money management boutique. Moon was asked to calculate present value and future value of its corporate clients employee pension fund obligation and the retirement funding for a high net worth client:

Main Street, Inc. - Corporate client

Moonns manager, Jean, estimates that Main Street will make a $10 million contribution five years from now to it employee pension fund. The estimated rate of return on plan assets has been at 9 percent per year. WU asks Moon to calculate (what is) the future value of this contribution 15 years from now, which is the date at which the funds will be distributed to Main Street retirees.

Donald Cohen High Net Worth client

Mr. Cohen, a 23 year old is a family member of one of its high net worth clients. Alex Wu provided the following information regarding Mr. Cohen and asked Moon to calculate the minimum amount that Cohen must accumulate by age 65 in order to fund his retirement.

Wu assumes Cohen consumption expenditures will increase with the rate of inflation, 3.5%, until he retires. Upon retiring he will have end-of-year expenditures equal to his consumption expenditure at age 65

Mr. Cohens Fact Sheet:

Current annual expenditure =$28,000

Expected inflation rate of current consumptions until retirement=3.5%

Expected return on investment =8%

Expected retirement age and the Life expectancy are 65 and 95 years, respectively.

In response to questions regarding interest rate and maturity on an investment, Moon maid the following points:

Point 1: The present value decreases as the time period increases and the interest rate is inversely related to the future value.

Point 2: An annuity due has payments that occur at the beginning of each time period. The present value of an annuity will increase when either the amount of the annuity payment increases or the interest rate increases.

Regarding Main Street's pension fund, Moonn calculated the future value of $10 million contribution 15 years from now is close to:

A.

$6,499,314

B.

$23,673,637

C.

$15,974,640

Is Moonns Point 1 most likely correct?

A.

No, the present value does not decrease as the time period increases

B.

No, interest rate is not inversely related to the future value

C.

Yes

The Point 2 from Moonns statement is most likely incorrect with respect to:

A.

An annuity due

B.

Interest rate

C.

Annuity payments

The minimum amount that Cohen must accumulate by age 65 in order to fund his retirement is close to:

A.

$110,144

B.

$1,175,758

C.

$1,336,920