Juanita Torres is 35-years old and lately has been working with her financial planner. She is...

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Juanita Torres is 35-years old and lately has been working with her financial planner. She is attempting develop a long-term savings and investment program. She has been thinking about all the major expenses that she is likely to incur over the next 50 years as she prepares for retirement and some major life changes for her and her children. Here of some of the important spending and income items that she and the financial planner have considered: Homework #1 - Parts A-C 1. She expects to be able to retire 30 years from now and plans on spending $175,000 in her first year of retirement. O O Assume the first payment is coming 31 years from today and the last one occurring 50 years from today. Her financial planner has told her to expect the spending to grow 2% per year in nominal dollars. 2. She has two children and needs to fund their college educations O Payments will begin 20 years from today (estimated to be $55,000 per year for the first child) and 22 years from today (at $58,000 per year for the second child). She has an arrangement that locks in those expected college expenses, so they don't grow once her children start school. 3. She intends to buy a winter vacation home for $800,000, 12 years from today. At that time she plans to make a $200,000 down payment. O O She will finance the rest of the purchase with a 15-year mortgage with annual payments at a projected interest rate of 5%. 4. She wants to leave her two children $450,000 each, 50 years from today 5. She desires to fund an endowment for her alma mater to help needy finance students O The payments will begin 36 years from today with a payment of $35,000 and grow at a rate of 4% annually in perpetuity in nominal terms 6. She just found out that her rich uncle has set up a trust for her O She will receive fixed $30,000 payments, beginning five years from today. These payments will come every other year through year 13 (five payments in all). 7. She will begin drawing Social Security at the end of the year that she turns age 70. Her initial payment will be $50,000 per year. Social Security grows with the inflation rate. Other Assumptions 1. Juanita can earn 7.5% (nominal) annually on her investments 2. The inflation rate over the entire period is 3% 3. Ignore any tax implications of her financial decisions (a bad idea) Model Outputs Part A 1. How much will Josephine need if she were to put aside one lump sum amount today in addition to her existing savings? Perform the calculation in two ways: a. Calculate the present value of each cash flow separately and sum those calculations over all the cash flows. b. Calculate the combined present value of each year's cash flows and sum the amounts. Show that the result is the same as part a. 2. How much will Josephine need to save, in equal amounts for the next 30 years, starting one year from today, to be able to meet the cash flow needs? Part B Juanita is rightly concerned that her retirement spending needs might vary and that the return on her investments is highly uncertain. She is interested in how the interplay of those two variables might impact her required annual savings. Calculate that annual savings required in Part 2 at nominal interest rates of 5-10% increasing in 1% increments and retirement spending amounts of $125,000 - $225,000 increasing in $25,000 increments. Using Conditional Formatting, highlight in green fill those combinations of investment returns and retirement spending that result in required savings less than the currently projected amount in Part A. Part C Juanita has done some analysis of her annual spending on living essentials and has some concerns about how much she can set aside each year. Her financial planner has suggested boosting the expected return on her investments by taking on more portfolio risk. Holding the inflation rate constant at 3%, what nominal rate does Juanita need to earn in order meet her long-term financial plan with annual savings limited to $40,000 a year? Juanita Torres is 35-years old and lately has been working with her financial planner. She is attempting develop a long-term savings and investment program. She has been thinking about all the major expenses that she is likely to incur over the next 50 years as she prepares for retirement and some major life changes for her and her children. Here of some of the important spending and income items that she and the financial planner have considered: Homework #1 - Parts A-C 1. She expects to be able to retire 30 years from now and plans on spending $175,000 in her first year of retirement. O O Assume the first payment is coming 31 years from today and the last one occurring 50 years from today. Her financial planner has told her to expect the spending to grow 2% per year in nominal dollars. 2. She has two children and needs to fund their college educations O Payments will begin 20 years from today (estimated to be $55,000 per year for the first child) and 22 years from today (at $58,000 per year for the second child). She has an arrangement that locks in those expected college expenses, so they don't grow once her children start school. 3. She intends to buy a winter vacation home for $800,000, 12 years from today. At that time she plans to make a $200,000 down payment. O O She will finance the rest of the purchase with a 15-year mortgage with annual payments at a projected interest rate of 5%. 4. She wants to leave her two children $450,000 each, 50 years from today 5. She desires to fund an endowment for her alma mater to help needy finance students O The payments will begin 36 years from today with a payment of $35,000 and grow at a rate of 4% annually in perpetuity in nominal terms 6. She just found out that her rich uncle has set up a trust for her O She will receive fixed $30,000 payments, beginning five years from today. These payments will come every other year through year 13 (five payments in all). 7. She will begin drawing Social Security at the end of the year that she turns age 70. Her initial payment will be $50,000 per year. Social Security grows with the inflation rate. Other Assumptions 1. Juanita can earn 7.5% (nominal) annually on her investments 2. The inflation rate over the entire period is 3% 3. Ignore any tax implications of her financial decisions (a bad idea) Model Outputs Part A 1. How much will Josephine need if she were to put aside one lump sum amount today in addition to her existing savings? Perform the calculation in two ways: a. Calculate the present value of each cash flow separately and sum those calculations over all the cash flows. b. Calculate the combined present value of each year's cash flows and sum the amounts. Show that the result is the same as part a. 2. How much will Josephine need to save, in equal amounts for the next 30 years, starting one year from today, to be able to meet the cash flow needs? Part B Juanita is rightly concerned that her retirement spending needs might vary and that the return on her investments is highly uncertain. She is interested in how the interplay of those two variables might impact her required annual savings. Calculate that annual savings required in Part 2 at nominal interest rates of 5-10% increasing in 1% increments and retirement spending amounts of $125,000 - $225,000 increasing in $25,000 increments. Using Conditional Formatting, highlight in green fill those combinations of investment returns and retirement spending that result in required savings less than the currently projected amount in Part A. Part C Juanita has done some analysis of her annual spending on living essentials and has some concerns about how much she can set aside each year. Her financial planner has suggested boosting the expected return on her investments by taking on more portfolio risk. Holding the inflation rate constant at 3%, what nominal rate does Juanita need to earn in order meet her long-term financial plan with annual savings limited to $40,000 a year?

Answer rating: 100% (QA)

Part A Retirement Expenses Juanita plans to retire 30 years from now and expects to spend 175000 in her first year of retirement Her financial planner ... View the full answer