Financial Decision-Making

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Category:
Finance
Subcategory:
Financial Decision Making
Level:
Academic
Pages:
4
Words:
621
View sample
Case 1 In this case, the PVs (present value) of both costs and benefits must be equal. As a result, we will divide this into 2 segments, the benefits and the costs. Here, costs are the deposits, a 30-year annuity with the first deposit made in a year: PV costs: (C / 0.08) * {1 - 1 / (1.08)30} And the withdrawals she is going to make after her retirement, is a 20-year annuity paying $ 90,000 each year with the first withdrawal being made after 31 years. So, in 30 years, this annuity will value: PV 30: (90,000 / 0.08) * {1 - 1 / (1.08)20} = 1125000 * 0.79 = $ 883,633.27 This is also the amount needed at retirement. The same amount will be used to answer all the other questions of this case. Moreover, we will discount this value for 30 years to know the PV of the benefits. PV benefits: $ 883,633.27 / 1.0830 = $ 87813.12 As the PVs (present value) of both costs and benefits must be equal, so the calculation is as follows: $ 87813.12 = (C / 0.08) * {1 - 1 / (1.08)30} = $ 7,800.21 To answer this question, first we determined the amount she would need at retirement. And then we discounted that amount by 8% for 30 years, which is: $ 87813.12. This should be the one lump sum deposit she can make today. To solve this problem, we will first breakdown each component in the following way - Future value of the employer’s annual input at retirement = $ 169,924.82 Future value of the trust fund at the time of retirement = $ 53,973.12 Therefore, the revised amount to save every year based on these conditions (using the annuity formula) would be = $ 5,823.77 Case 2 Age certainly affects Ben’s decision. He completed his college degree when he was 22 and he has been working for the last 6 years. That should give him enough time to save some money for his post-graduation degree. Assuming he can finish his MBA in 2 ...
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