Question
sorry i already posted the problem but the formula didnt come up correctly so this is the correct problem: Purpose of the project Time Value
sorry i already posted the problem but the formula didnt come up correctly so this is the correct problem:
Purpose of the project
Time Value of Money can mean the difference between retiring comfortably or retiring with anxiety because you did not set aside enough retirement savings. Time value of money is important because it helps investors and people saving for retirement determine how to get the most out of their money. Funds that you invest today can grow and that growth can compound over time.
The purpose of this assignment is to understand the concept of the time value of money and utilize the present value of annuities and growth annuities in the case-study scenario in order to answer the requirements.
Case Study Scenario
Thomas was 45 years old just before the application of the Memorandum reforms in 2013 (Troika). He has been working in the public sector as a school principal for the last 10 years. His annual salary in 2012 was 40.000 euros. Based on the government rules for public sector employees before the application of the Memorandum reforms, Thomas would have retired at the age of 63 years old. The first annual pension was calculated based on the following equation:
=50% (final annual salary)( 1+g )
Where, g = the expected growth rate of pensions.
Based on his medical record, life expectancy for Thomas is estimated at 80 years.
In order to provide financing to the Republic of Cyprus, the European Union has recommended the application of several reform measuresregarding the salaries and pensions of people working in the public sector. Among other things, the Memorandum reform measures included the following:
The increase of retirement age to 65 years of age.
No growth rate in salaries for a five-year period.
The reduction of 15% in annual salaries.
Make the following assumptions:
Thomas will continue working in the public sector until his retirement age.
The average long-term annual interest rate is 3,6%.
Before the application of the reform measures, the average annual increase in public sector salaries and pensions was 2,5% and 2% respectively.
After the end of the five-year period of no growth rate, salaries and pensions will increase at a growth rate of 2%.
Annual salaries and pensions are paid at the end of each year.
The application of the reform measures started at the beginning of 2013 (1/1/2013).
The method of calculating the first annual pension will not change after the reforms.
Based on the case study information given above, answer the following questions.
Requirements
1. Based on what was in force before the Memorandum, calculate the following:
a. The final annual salary and the first annual pension of Thomas.
b. The final annual pension of Thomas.
c. The present value of Thomass pensions at the time point of the application of the Memorandum reforms.
d. The present value of Thomass salaries at the time point of the application of the Memorandum reforms.
2. Based on the application of the Memorandum reforms, calculate the following:
a. The final annual salary and the first annual pension of Thomas.
b. The final annual pension of Thomas.
c. The present value of Thomass pensions at the time point of the application of the Memorandum reforms.
d. The present value of Thomass salaries at the time point of the application of the Memorandum reforms.
e. The net economic benefit or loss of the Memorandum reforms for Thomas at the time point of their application in the public sector.
3. Explain how time value of money can help us solve our real-life problems (not based on the above scenario).
You are required to use diagrams (timelines) and formulas and present every calculation in detail etc.
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