Imagine it is 12/26/2016. You work as a Financial Planning Consultant at Andrew, Henderson &

Company. You have received a memo from Steve James, one of the partners at the company,

requesting your help on a consulting project involving a client, Mr. Neil Spencer. Mr. Spencer is

a civilian who works at Mather Air Force Base (MAFB), located in Sacramento County,

California, and is seeking advice regarding a resource allocation problem related to his future

career plans.

Mr. Spencer has indicated that he has been working in data processing at MAFB since

graduating from high school seven years ago. MAFB has been scheduled for closure by the

Defense Base Closure and Realignment Commission one year from now (12/31/2017); thus, the

personnel at MAFB cannot remain in their jobs at the Base beyond the next year.

Your companys staff members have compiled some additional information about Mr. Spencer.

Using that information, your job is to make a recommendation as to whether Neil Spencer should

leave his job at MAFB on 12/31/2016 (now), or on 12/31/2017 (one year from now).

For this assignment, please indicate whether you recommend Mr. Spencer leave now or one

year from now, and provide any supporting calculations.

------------------------------------------------------------------------------------------

Andrew, Henderson & Company

Financial Planning Consultants

12/23/2016

STAFF MEMORANDUM

SUBJECT:

Sources and Uses of Income of Neil Spencer for the Year Ended December 2016

Current Income

Neil Spencer, who has a full-time data processing job at the MAFB, earned a gross salary of

$18,000 this year. According to government officials, no changes of the salary scales, in real

terms, are expected for next year.

Although Spencer has never received a formal computer repair training, he also repairs

computers at home during his spare time. Spencer uses electronic tools that he acquired 2 years

ago at $48,000. The average useful life of the tools is 5 years using straight line with zero

salvage. The cost of the tools was financed in part with a bank loan. Spencer's self-employment

income, net of depreciation, averages $8,400 per year.

Spencer believes in the practice of "saving for rainy days." Therefore, in 2016 he started

the practice of investing his excess cash in stocks of the computer corporation owned by his

uncle Steve. Spencer earned $540 this year on an annual average investment of $3,000. This

return is expected to remain constant over the next two years.

Lease Contract and Compensation Award

Four years ago Spencer signed a 10-year transferable, noncancelable lease for his 800

square-foot condominium at $800 per month. Due to a recent earthquake, there is shortage of

apartments in the area; thus, lease renewals are currently running at about $1,200 per month for

an 800 square-foot condominium.

Since the government will be unable to fulfill its job contract with Spencer, it has offered

to pay him an early-separation compensation award of $30,000 if Spencer chooses to leave his

job now. If, on the other hand, Spencer chooses to leave his job one year from now, the

compensation award that he will receive one year from now will amount to $32,000.

If Spencer chooses to leave his job now and enroll in the one-year computer repair

program, he would sublease his condominium to a third party for the next two years (2017 and

2018) at the market rate. If, on the other hand, Spencer chooses to leave his job one year from

now, he would sublease his condominium to a third party for only the year 2018.

Financing

To help with financing for the purchase of some of his electronic tools, Spencer obtained

from Sacramento Central Bank a loan of $20,000. The loan is guaranteed by Spencer's uncle.

The annual interest ($2,400) is due annually; the principal is due three years from now.

Prospects for the Next Two Years (2017 and 2018)

Projected annual sources of funds:

Given the imminent closure of MAFB, Spencer has accepted work in Uncle Steve's

computer company on a part-time basis immediately upon getting a computer repair training

certificate. Uncle Steve has offered Spencer a starting annual salary of $18,000. The cost of the

one-year computer repair program in which Spencer has decided to enroll is estimated at $4,500,

and will be paid in full, in advance, by the government regardless of the early-separation date

chosen by Spencer. According to Spencer, all of his cost-of-living expenses are expected to

remain unchanged in real terms for the next two years. Spencer plans to continue repairing

computers at home while at school and thereafter. He expects to earn about the same annual

average self-employment income net of depreciation that he is currently earning. The following

table summarizes Spencer's projected annual sources of funds for 2017 and 2018 for the two

options under consideration:

Projected Annual Net Retail Sales and Operating Expenses for 2017 and 2018

Disposition of electronic tools:

Spencer has decided to sell some of his tools at the time he enrolls in school. The netbook value

of those tools now is $10,000, and will be $8,000 one year from now. Spencer estimates that the

tools can be sold either now or one year from now for about $13,000.

2017 2018 Leaves job 12/31/2016 (now): Gross Salary Net Self-employment income $0 $8,400 $18,000 $8,400 Leaves job 12/31/2017 (one year from now): Gross Air Force salary Net Self-employment income $18,000 $8,400 $0 $8,400 2017 2018 Leaves job 12/31/2016 (now): Gross Salary Net Self-employment income $0 $8,400 $18,000 $8,400 Leaves job 12/31/2017 (one year from now): Gross Air Force salary Net Self-employment income $18,000 $8,400 $0 $8,400