For all questions assume the relevant tax rate is 30 percent and all annuities begin at the end of year 1. 1.  (a) The $30,000 of excess liquidity is earning 5 percent compounded monthly in a money market fund. This is a 5.12 percent annualized return. How was this determined?

(b) This annualized return of 5.12 percent results in an after-tax return of 3.58 percent since taxes on any interest must be paid each year. How was this determined?

2. Assume a 4 percent after-tax annual return will be earned in a money mar ket fund. How much will be accumulated in 20 years if the $30,000 remains in the money market and $3,052 per year is placed in the same investment? (Note that you are analyzing the "as is" investment strategy.) 3. (a) If 30,000 after-tax dollars are invested at 7 percent in a single-premium tax-deferred annuity, how many after-tax dollars will be accumulated in 20 years?

(b) Studebaker can afford to have his annual income reduced by 3,052 after tax dollars. How much is this before taxes? If these before-tax dollars are invested each year at 7 percent, how many after-tax dollars will be accu mulated in 20 years?

(c) Redo part (b) assuming 8 percent is earned during years, 1 to 10,5 percent during years 11 to 15, and 7 percent in years 16 to 20.

4. (a) Studebaker is eligible to put 12,000 before-tax dollars each year into a tax-deferred annuity (TDA). In order to invest in a TDA, however, he must have his salary reduced, and the case indicates that he can afford a reduction in his spendable income of $3,052 each year without disrupting his lifestyle. One investment option is to increase the amount placed into a TDA each year to the legal maximum of $12,000 and move funds from the money market to cover the resulting shortfall in Studebaker's spendable income. How much money will he need to transfer each year from the money market?

(b) Assume Studebaker will earn a 4 percent after-tax annual return in the money market. For how many years can he contribute the maximum amount to the TDA and cover any shortfall in his spendable income with funds from the money market? (Round your answer to the next highest year.)

(c) How many after-tax dollars will be accumulated in 20 years if the legal maximum is placed in the TDA as long as possible and a 7-percent annual return is earned? (Keep in mind that Studebaker would reduce the annual amount invested in the TDA when the funds in the money market are exhausted.)

(d) Redo your answer to part (c) assuming 8 percent is earned during years 1 to 10,5 percent during years 11 to 15, and 7 percent in years 16 to 20.

5. Based on your previous calculations and other information in the case, what do you recommend? Justify your answer.