Question
Income (After Taxes) +: As a fresh college graduate, you recently resumed a dream job with a top engineering firm. While your starting annual salary
Income (After Taxes) +: As a fresh college graduate, you recently resumed a dream job with a top engineering firm. While your starting annual salary is $50,000, you are expected to receive a 4% annual pay raise and your annual salary puts you in the 20% income tax bracket. (Also assume you get no tax refund in each tax season). Expenses -: 1) You have decided to move on to the next big phase of your life becoming a homeowner. To this end, you take on a 30 year, 7% mortgage with an original balance of $150,000. You start paying monthly mortgage payments. 2) Each month, you also pay $250 into a reserve account, which the bank uses to pay your home insurance and property taxes. 3) Your total monthly expenses for other necessities including food, transportation, personal care, entertainment, etc. is $650 and you expect this to increase by 4% annually. 4) Given your passion for continuous personal development, you have plans of attending graduate school 3 years from now. The graduate school program is structured such that you are expected to graduate in 2 years, with a projected annual tuition of $25,000. Your company has tuition reimbursement policy of only up to $10,000 per year. To take care of the portion of your tuition not covered by the company, you have decided to set up graduate school fund account with a bank offering a 4% annual interest rate. You also want to set up saving accounts for your retirement of old ages and set up another account for emergencies. As a overall saving plan, each month, you put the following percentages of whatever left of your monthly income (after all your expenses have been covered): 4.1) 30% into the graduate school fund account (this account pays back 4% interest) 4.2) 40% into a 6% retirement funds account, 4.3) 30% into a 2% emergency savings account. Alternative Loan Options: In the event that your graduate school fund account cannot cover your share of the tuition, you can cover the balance through a 5% additional bank loan, which you will start to repay monthly at the end your program (i.e. at the end of year 2) over a period of 3 years. (That is if the funds you saved in gradute school account (4.1) is not enough, you can take additional loan to pay it- it charges 5% and requires to be paid when you finish the school. It must be paid within two years) Assumptions: Assume 1- your tuition payment is made at the start of each semester, and 2- for simplicity, assume that each semester runs for 6 months (i.e. 1st semester January through June, and 2nd semester July through December). 3- Also assume that interest does not kick in on the tuition loan until end of year 2. (Hint1: do you pay all your school fees at the beginning of the year or at the beginning of first month of each semester? And semester by semester) (Hint2: Example: If semester fees are 20K, and your company pays 5 K/year then how much you pay 1stsemester : 20-5, how much you pay next semester: 20-0) Hint 3: Suggestion: Also before you borrow a loan to pay school fees, check your total savings if there is any money there) Hint 4: Suggestion: Make sure there is a separate column for total savings that adds yearly investments and compounded interests of the previous term. The decision to be made You are faced with the challenge of figuring out how best to pay off your mortgage. You will like to pay off your mortgage sooner than the 30 years but you are wary of the impact this could have on your other plans. Specifically, you wish to determine which of the following options is the most profitable over a 30 year analysis period: (a) Pay off mortgage according to the original schedule (b) Increase each total monthly mortgage payment to 120% of original scheduled payment (c) Double the monthly mortgage payment You must document all your calculations and show economic analysis using spread sheet (one with illustrating the functions and one with values or combined)
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