Case Application
TIME VALUE OF MONEY
Richard e-mailed me that he and Monica differed about the impact of his extra spending over the past 15 years. He calculated it at about $3,000 a year. He said the total cost of $45,000 was well within his capability to make up. Monica said the cost was much higher and asked that they compute it. They had been offered an investment of $20,000 that would pay $70,000 in 20 years. They want to know if they should take it. Finally, Richard could sign up for an annuity at work. It would cost $100,000 at age 65 and provide payments of $8,000 per year over his expected 17-year life span. He wants to know if it is attractive. The appropriate market rate of return on investments is 7 percent after tax.
***^^^^ Read case above ^^^^*** and solve/answer case application questions 1-5 below.
Questions
- Calculate what the $3,000-per-year deficit, had it been invested, would have amounted to at the end of the 15-year period.
- Explain to Richard what compounding is and how it affected the cumulative amount received in question 1.
- Calculate the return on the proposed $20,000 investment and indicate the factors entering into your recommendation to accept or reject it.
- Indicate the expected return on the annuity and whether it should be accepted or rejected.
- Explain the time value of money for the financial plan using your answers to questions 1 through 4 in this part of the financial plan to help you communicate the time value information to Richard and Monica.
Expectations
- You have to read the case background and analyze the financial issues by answering case application questions assigned.
- You should demonstrate the ability to apply personal finance concepts, vocabulary, and models to analyze financial situations, synthesize the week’s course material, and relate it to the case.
- Case analysis should be substantive and insightful. You should use assigned readings to support case analysis and use proper MLA in-text citations and works cited formatting where applicable.
