Question

You are a financial adviser and the following information is an extract of data you gathered as part of fact finding during an initial client consultation for married couple Janet and Steven Blake. Janet works as a Teacher and Steven works as town planner at the local government. The have two children who are aged 12 and 14.

The Blake’s life goal has been to buy a property in the country and live the quiet life 10 years from now. They need to save a $200,000 deposit to achieve this dream. They have $60,000 invested now and they estimate they can save $5000 p.a. for 5 years and then $10,000 p.a. for the 5 years following this. They have come to you see if they can achieve this goal.

Required:

Calculate the future value of the investment portfolio 10 years from now assuming it will earn a 5% p.a. after tax. In this calculation you should include the FV of the current investments and the FV of the contributions that Blake’s estimate that they make over the next 10 years. Assume that contributions are made at the end of the year and that the first contribution will be made 365 days from now. Finally, explain one strategy that Janet and Steven could reach their goal more quickly and show the influence that this will have.

Future value FV = PV(1 + i)ⁿ                          

Annuity (Future value) FV = PMT[(1 + i)ⁿ – 1]/ i

Please write details of the calculations and strategy

Answer 1

Future Value of savings after 10 years = PV x (1 + i)^n = 60,000 x (1 + 5%)^10 = $97,733.68.... 1)

Future Value after five years of annuity = PMT x ((1 + i)^n - 1) / i = 5,000 / 5% x [(1 + 5%)^5 - 1] = $27,628.16

Its value in year 10 = 27,628.16 x (1 + 5%)^5 = $35,261.31... 2)

Future Value of second annuity = 10,000 / 5% x [(1.05^5 - 1) = $55,256.31... 3)

=> Total Value = $188,251.30

They will fall short of their target and hence, in order to achieve the target they might want to increase their annual savings.