scenario 1

FIN 350 Project Case Study You are a CFP professional and have met with Alix and Eddy Pereira, who have come to you for help with several financial planning goals. Alix and Eddy own a computer software company: E & A, LLC. Alix is 32 years old, and Eddy is 37 years old. They are happily married and have two children: Tomas (age 5) and Maya (age 3). All family members are in good health, and the family has no history of serious health issues. Based on these facts, along with their family health histories, Alix and Eddy each expect to live to be 90 years old. Alix and Eddy have completed a risk tolerance questionnaire, which indicates that they have a high tolerance for risk. They would like their portfolio and investment decisions to be based on their expected wealth, their desire for security, the funding levels that they are trying to achieve, and the likelihood of achieving those funding levels. They have also told you that they usually agree when it comes to financial matters; however, in your initial meetings you have noticed a couple of areas of conflict: They occasionally disagree about financial wants versus needs. Eddy has indicated that he is often inclined to sell an investment immediately if they suffer a loss and move that money into an investment that has recently performed well. Alix prefers to hold on to the investment and tends to focus more on the fact that it has performed well in the past. Budgeting Eddy and Alix have asked you to assess their overall financial health based on an analysis of their financial statements. They would like you to identify opportunities for improvement, as well as potential problem areas in their budget. They would also like you to recommend realistic changes that they can make to improve their overall financial health and to address any problem areas that you identify. They have asked that your budget recommendations include an explanation of the advantages and disadvantages of refinancing the existing 30-year mortgage to a 15-year mortgage with a slightly lower interest rate. Goal Setting Alix and Eddy have asked you to help them identify and prioritize specific financial planning goals based on their financial statements and the qualitative information that you have gathered. Retirement Planning Alix and Eddy would like to continue to run their business until Alix turns 62, at which time the couple would like to sell the company and retire. They anticipate that the business will continue to generate the same amount of income each year, that their personal expenses will remain constant until retirement, and that they will net $5 million from the sale of the business when they retire. Based on an analysis of current expenses on their income statement along with their expected spending in retirement, Alix and Eddy anticipate that their annual personal expenses in retirement will be 80% of their total annual expenses today. You have mutually agreed to base your retirement planning recommendations on this assumption. Alix and Eddy have asked you to determine the following, which will require you to assume an annual inflation rate and an average annual return on investment: How much they will need to have saved for their retirement in 30 yearsin addition to their current assets, their annual Social Security benefits, and the sale of their businessto have sufficient funds to meet their income needs in retirement Their required annual savings to achieve this funding Your report to the Pereiras should include an explanation of how you arrived at the assumed inflation rate, citing your source(s) of information. Alix and Eddy have also asked for specific retirement savings and investment vehicle recommendations. These recommendations should include the following: An explanation of the tax implications of the retirement savings vehicle alternatives Investment recommendation(s) that align with their tolerance and capacity for risk An explanation of how you determined the assumed rate of investment return. The assumed rate of return should be based on your investment recommendation(s) and should be used in the retirement funding and annual savings calculations that you perform. Education Planning The couple plans to send both Tomas and Maya to Ivy League colleges and expect college expenses to be $50,000 per year (in today's dollars) for each child, for four years of school. The $100,000 in current education savings is in a money market account. The couple would like to take advantage of any gifting opportunities for their children. Alix and Eddy have asked you to determine the following, which will require you to assume an annual tuition inflation rate and an average annual return on investment: The total amount that they must save, in addition to the $100,000 in current education savings, by the time Tomas enters college to have sufficient funds to cover educational expenses for both children Their required annual savings to achieve this funding Your report to the Pereiras should include an explanation of how you arrived at the assumed tuition inflation rate, citing your source(s) of information. Alix and Eddy have also asked for specific education savings and investment vehicle recommendations. These recommendations should include the following: An explanation of the tax implications of the education savings vehicle alternatives Investment recommendation(s) that align with their tolerance and capacity for risk An explanation of how you determined the assumed rate of investment return. The assumed rate of return should be based on your investment recommendation(s) and should be used in the education funding and annual savings calculations that you perform. Tax Planning Alix and Eddy have also asked about tax reduction opportunities. In addition to taking advantage of taxadvantaged vehicles for their retirement and for education savings and gifting opportunities for their children's education funding, they are interested in understanding the following: Is an LLC the appropriate legal structure for their business as it relates to income taxes? What are the potential tax benefits of charitable contributions? Should they be concerned about being subject to the alternative minimum tax (AMT)? What steps can they take to avoid triggering the AMT? Economic and Market Trends Alix and Eddy have asked you to incorporate the following into your analysis: The impact of stock market underperformance on their savings and investments regarding retirement income. If the annual rate of return on investment is 1.5% less than your assumed rate of return, how will this affect the Pereiras' required annual savings for retirement? The impact of greater than anticipated inflation on their savings and investments regarding retirement income. If the inflation rate is 2% more than your assumed inflation rate, how will this affect the Pereira's required annual savings for retirement? The impact of greater than anticipated tuition inflation on their savings and investments regarding education funding. If the tuition inflation rate is 1% more than your assumed tuition inflation rate, how will this affect the Pereira's required annual savings for education? Summary Your final report to the Pereiras should include a one-page conclusion section that incorporates the following: A summary of the key needs/objectives of the client Actionable recommendations for addressing the client needs/objectives A summary and explanation of your assumptions Financial Statements Balance Sheet Assets Savings (cash/money markets) $350,000 Investments (mutual funds) $2,500,000 Educational savings $100,000 Home $3,000,000 Rental property $500,000 Autos $200,000 Personal property $250,000 Life insurance $1,000,000 Total $7,900,000 Liabilities Credit cards $75,000 Car loans $100,000 Home mortgage $1,000,000 Personal line of credit $125,000 Total liabilities $1,300,000 Equity $6,600,000 Total Liabilities and Equity $7,900,000 Income Statement Income E & A, LLC income $2,000,000 E & A, LLC expenses $1,500,000 Rental income $24,000 Investments $50,000 Total Income $574,000 Expenses Credit card payments $45,000 Car loan payments $18,000 Mortgage payments $60,000 LOC payments $15,000 Household $80,000 Entertainment $65,000 Gasoline $6,000 Home insurance $10,000 Home maintenance $25,000 Health insurance $12,000 Property taxes $30,000 Rental property insurance $2,000 Rental property maintenance $6,000 Income taxes (effective rate: 26%) $149,240 Total Expenses $523,240 Net Income $50,760

Based on scenario 1 please answer

Overview

As a newly hired CFP professional, you are responsible for providing a comprehensive picture of your client's current finances in relation to their financial goals. In your project for this course, you will be asked to construct a financial plan for the client by conducting an analysis and evaluation of client goals to determine appropriate recommendations that you will then present to the client. In this second milestone, you will evaluate factors that influence goals related to retirement, educational funding, and budget recommendations.

Directions

Before you begin, review the Project Case Study provided in the Supporting Materials section. Then, using your financial calculator, calculate and address each of the following in a minimum of sentences using the template provided. Include an appendix to show your detailed calculations and cite them appropriately. For example, "Funding needed is 3.340 USD (see Appendix A)."

1. Using the annuity method, perform the time value of money calculations to determine the client's retirement funding needs. Address the following in your response and include any assumptions used in making your recommendations:
   1. The client's total retirement funding need at retirement age
   2. The annual savings required to meet the retirement goal
2. Using the uneven cash-flow method for multiple children, perform the time value of money calculations to determine the client's educational funding needs. Address the following in your response and include any assumptions used in making your recommendations:
   1. Net present value (NPV) of the total funding need
   2. The annual savings required to meet the education goal
3. Propose budget recommendations that fit with the client's financial data that address the opportunities identified. Address the following in your response and include any assumptions used in making your recommendations:
   1. Financing strategies
   2. Debt management
   3. Cash-flow management
      1. Income
      2. Expenses