What will your portfolio be worth in 10 years? In 20 years? When you stop working? The

Human Resources Department at Tri-State Corporation was asked to develop a financial planning model that would help employees address these questions. Tom Gifford was asked to lead this effort and decided to begin by developing a financial plan for himself. Tom has a degree in business and, at the age of 25, is making $34,000 per year. After two years of contributions to his companys retirement program and the receipt of a small inheritance,

Tom has accumulated a portfolio valued at $14,500. Tom plans to work 30 more years and hopes to accumulate a portfolio valued at $1,000,000. Can he do it?

Tom began with a few assumptions about his future salary, his new investment contributions, and his portfolio growth rate. He assumed 5% annual salary growth rate as reasonable and wanted to make new investment contributions at 4% of his salary. After some research on historical stock market performance, Tom decided that a 10% annual portfolio growth rate was reasonable. Using these assumptions, Tom developed the Excel worksheet shown in Figure 16.18. Toms specific situation and his assumptions are in the top portion of the worksheet (cells D3:D8). The worksheet provides a financial plan for the next five years. In computing the portfolio earnings for a given year, Tom assumed that his new investment contribution would occur evenly throughout the year, and thus half of the new investment could be included in the computation of the portfolio earnings for the year. Using Figure 16.18, we see that at age 29, Tom is projected to have a portfolio valued at $32,898.

Toms plan was to use this worksheet as a template to develop financial plans for the companys employees. The assumptions in cells D3:D8 would be different for each employee, and rows would be added to the worksheet to reflect the number of years appropriate for each employee. After adding another 25 rows to the worksheet, Tom found that he could expect to have a portfolio of $627,937 after 30 years. Tom then took his results to show his boss, Kate Riegle.

Although Kate was pleased with Toms progress, she voiced several criticisms. One of the criticisms was the assumption of a constant annual salary growth rate. She noted that most employees experience some variation in the annual salary growth rate from year to year. In addition, she pointed out that the constant annual portfolio growth rate was unrealistic and that the actual growth rate would vary considerably from year to year. She further suggested that a simulation model for the portfolio projection might allow Tom to account for the random variability in the salary growth rate and the portfolio growth rate.

After some research, Tom and Kate decided to assume that the annual salary growth rate would vary from 0% to 10% and that a uniform probability distribution would provide a realistic approximation. Tri-States accounting firm suggested that the annual portfolio growth rate could be approximated by a normal probability distribution with a mean of 10% and a standard deviation of 5%. With this information, Tom set off to develop a simulation model that could be used by the companys employees for financial planning

Finanical planning worksheet for tom gifford

A	B	C	D	E	F	G	H
1	Financial	Analysis Portfolio	Projection
2	Age			25
3	Current	Salary		$34,000
4	Current	Portfolio		$14,500
5	Annual	Salary Growth	Rate	5%
6	Annual	Investment	Rate	4%
7	Annual	Portfolio Growth	Rate	10%
8			Beginning		New	Portfolio	Ending
9	Year	Age	Portfolio	Salary	Investment	Earning	Portfolio
10	1	25	14,500	34,000	1,360	1,518	17,378
11	2	26	17,378	35,700	1,428	1,809	20,615
12	3	27	20,615	37,485	1,499	2,136	24,251
13	4	28	24,251	39,359	1,574	2,504	28,329
14	5	29	28,329	41,327	1,653	2,916	32,898

Managerial Report

1. without considering the random variability in growth rates extend the worksheet in figure 12.18 to 30 years and confirm that by using the constant annual salary growth rate and the constant annual portfolio growth rate tom can expect to have a 30 year portfolio of 627,937$. what would toms annual investment rate have to increase to in order for his portfolio to reach a 30 year 1 million dollar goal?

2. Incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model assume that tom is willing to use the annual investment rate that predicted a 30 year 1 million dollar portfolio in part 1 show how to simulate toms 30 year financial plan use results from the simulation model to comment on the uncertainty associated with tom reaching the 30 year 1 million dollar goal discuss the advantages of repeating this simulation numerous times

3. what recommendations do you have for employees with a current profile similar to toms after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate?

4. assume that tom is willing to consider working 35 years instead of 30 years. what is your assessment of this strategy if toms goal is to have a portfolio worth 1 million dollars?

5. discuss how the financial model developed for tom gifford can be used as a template to develop a financial plan for any of the companys employees.

Please answer questions 1-5 thank you :)