Question

4. How much do I need to retire? Here are your assumptions. You are 30. You will retire when you are 65. You want $40,000 a year when you retire. You will be an aggressive investor today and have an average market return of 9%. When you retire, you will be conservative in your investing and get into bonds that have a market return of 4.5%. You expect that inflation will be 3%. You currently have $20,000 in savings as of today. You are expecting to live until 85. How much do you need to have saved when you turn 65? (Hint: if you want to work out how much you need to save every year, under PMT, it will be 36 years)

Answer: $1,000,000.00

Answer: $3,200,846.75

Answer: $45,000,000

Answer: $1,940,755.74


5. You are buying a car. You do not like playing the financing game where they leave you in the sales room for an hour to go calculate everything – because you are busy, you got stuff to do. The car costs $15,000. The interest on the car is 2.5% annual. You want to pay it off in 5 years. Tell the salesperson what the car payment will be per month.

Answer: $180.45

Answer: $266.21

Answer: $789.38

Answer: $50.00

6. You just graduated with your LSUS MHA. Healthcare professionals are eager to hire you. You have two competing job offers. Job #1 – offers $50,000 a year with a guarantee raise of 2% a year. Job #2 offers $48,000 with a guarantee of 6% raise every year. You know that you will stay at this job for 5 years minimum. You expect inflation (discount rate) to be around 3%. What job do you take?

Answer: Job #1 – The NPV is $250,450

Answer: Job #1 – The NPV is $238,051

Answer: Job #2 – The NPV is $246,984

Answer: Job #2 – The NPV is $415,002

Answer 1

4)

Retirement time = 30 years.

Amount required at Year 65 = $40000 and growing at rate of inflation every year. This is like a growing annuity.

The present value of this increasing annuity = ; where r is the interest rate

Earned (4.5%), g is the growth rate (3%) and t is 30 years.

PV = 938455.68

Hence the closest option is option 1.

This is the amount that should be saved by age 65.

5)

This question requires application of PV of annuity, which is mathematically represented as:

For this question, n = 5 * 12

                              = 60 months

                          r = 2.5%/12

                             = 0.2083% (monthly)

15000 = P * (0.1174/0.002083)

P = 15000/56.3464

= $266.21

6)
PVF @ 3%	Job 1 C.F.	PV	Job 2 C.F.	PV
0.9708738	50000	48544	48000	46602
0.9425959	51000	48072	50880	47959
0.9151417	52020	47606	53933	49356
0.888487	53060	47143	57169	50794
0.8626088	54122	46686	60599	52273
	TOTAL	238051		246984
The NPV is $246,984