Dave is a senior engineer working for a multinational company. He is 40 years old and ismarried with two children. His wife, Dawn, is 37 years old and is a senior lecturer in financeat a university. Their son, Don, is 14 and is studying in secondary school and their daughter,Drew, is 12 and in primary school.Dave earns $120,000 a year and Dawn earns $80,000 a year. Their salaries are expected toincrease by 4% every year and incomes are subject to an 18% tax rate. They are currently livingin a private condominium valued at $1.5 million and owe $800,000 to the bank, with annualmortgage payments of $70,000 expected for the next 20 years. The couple also contributes 10%of their salaries to a pension fund, which is matched by their employers. Annual living expensescurrently amounts to $60,000 for the couple but is expected to increase every year by 3% untilthey both retire, which is when Dave turns 65. They expect to live for another 25 years afterretirement and would like a comfortable retirement, budgeting $180,000 per year duringretirement for expenses. In addition, they would also like to have $5 million at the point ofretirement to cover any medical expenses incurred during retirement.The couple plans to invest their savings in a portfolio comprising money-market instruments,bonds, and stocks so that they can meet future cash flow needs. Currently, the market value ofthe couple's investment portfolio is $220,000 and the balance in their pension fund is $200,000.The pension fund is expected to earn annual returns of 2.5% and the income from the pensionfund will be used exclusively to fund their retirement needs. During retirement they do notexpect to pay any taxes as the income from the pension fund is not taxable.Both of them have each taken insurance policies for $1 million and named each other asbeneficiary. In the event both of them should pass on, the insurance proceeds will go to theirchildren.When Don turns 18, he will undergo national service and then he will enroll in university whenhe is 20. At the same time, Drew will also be ready to go to college when she turns 18. It isexpected that the combined college costs for the both of them will be $20,000 a year for fouryears. Before the children start college, the family plans to go on a holiday at an expected costof $20,000. The living expenses of Don and Drew are currently covered fully by theirgrandparents. Don and Drew are expected to be gainfully employed after graduation and willno longer require any financial support.You are engaged by Dave and Dawn to advise on their investment portfolio, which they willliquidate and inject into the pension fund upon their retirement.

Question 1

(a) Calculate the total dollar retirement needs at the point of the couples' retirement.(8 marks)

(b) Calculate the value of the pension fund at the point of the couples' retirement.(16 marks)FIN354 Tutor-Marked Assignment

(c) Construct a table that projects the net cash flows for the next twenty five years and estimate the return requirement for the couples' investment portfolio.(36 marks)

Question 2

(a) Discuss the time horizon and liquidity components of the couples' investment policy statement and, hence, evaluate their risk tolerance.(26 marks)

(b) The couple is considering choosing one of the following three portfolios:

Portfolio A: 10% money-market; 70% stocks; 20% bonds

Portfolio B: 20% money-market; 40% stocks; 40% bonds 

Portfolio C: 10% money market; 30% stocks; 60% bonds

Recommend the portfolio that is best suited to their needs.