If Jinhee contributes just 5 percent of her salary ($1850) and earns another $1850 (100 percent)

from her employer%u2019s match she will save a total of $3700 a year.

%uF0B7 At 8 percent she%u2019d have $958510.90 = ($3700 x

259.057 (FVIFA8% 40 years))

%uF0B7 At 10 percent she%u2019d have $1637594.10 = ($3700 x 442.593

(FVIFA10% 40 years)).The employer match is

%u201Cfree money%u201D that shouldn%u2019t be passed up. It is in Jinhee%u2019s best interest to start

saving immediately.

Approximately $2198.49 is required to be saved per year.

Factor Table C solution PV n/a

Calculator solution

PMT (FVIFA6% 3) FV

PV $0 $2198.49 PMT ?

3.184 $7000

I/Y 6% N3

FV $7000 CPT PMT -$2198.77

Total interest earned = $7000 %u2013 ($2198.77 x 3) = $403.69

Approximately $177.95 is required to be saved per month (using a financial calculator).

PV

PMT

I/Y

N

FV

CPT PMT

$0

? 6%/12=.5% 3*12=36 $7000 $177.95

Total interest earned = $7000 %u2013 ($177.95 x 36) = $593.80

By making monthly payments Jinhee will earn $190.11 ($593.80 %u2013 $403.69) more interest.

3. The value of Jinhee%u2019s trust fund value at age 60 is approximately $190300.

Factor Table C solution PV $25000 PMT n/a (FVIF7% 30) 7.612

Calculator solution

PV -$25000 PMT 0

I/Y 7%

29

N 30 FV $190300 FV ?

CPT FV $190306.38 4. Paul%u2019s annual payment would be approximately $12950.

Factor Table D solution

Calculator solution

PV $100000 PMT ?

I/Y 5%

N 10

FV 0

CPT PMT -$12950.46

PV PMT

(FVIF5% 10)

FV n/a

$100000 $12950

7.722

Paul%u2019s monthly payment would be approximately $1060.66 (using a financial

calculator).

PV

PMT

I/Y

N

FV

CPT PMT

$100000

? 5%/12=.4167% 10*12=120

0 -$1060.66

Paying the loan on a monthly basis would result in an interest savings of $2225.40 [($12950.46 x 10) %u2013 ($1060.66 x 120)] over the life of the loan.

5. Student answers will vary but these are representative:

%uF0B7 %u201CMax out%u201D tax-deferred savings in employer plans.

%uF0B7 Increase interest rate earned on investments.

%uF0B7 Repay high interest debt as soon as possible.

%uF0B7 Shop for a low-rate mortgage.

DISCUSSION CASE 2 ANSWERS (using a financial calculator)

1. The approximate monthly payment using the calculator is $2147.29.

PV

PMT

I/Y

N

FV

CPT PMT

-$400000

? 5%/12=.4167% 30*12=360

0 $2147.29

2. His retirement income will last for 195 months (16.3 years) or until approximately age 73. His portfolio needs to generate

$3000 in income per month ($5800 %u2013 $2800 retirement annuity).

PV -$400000 PMT $3000

I/Y 5%/12=.4167% N?

FV 0

CPT N %uF0BB 195 months

Now his retirement income will last for 945 months (78.8 years) or until approximately age 135. His portfolio only needs to cover

$1700 per month ($4500 %u2013 $2800).

PV -$400000 PMT $1700 I/Y 5% N?

FV 0

CPT N %uF0BB 945 months

3. Factoring in the Social Security benefit and using his current projected expense level of $5800 he will deplete his portfolio

at age 80.

Step 1: The value of the portfolio remaining at age 67 is $165992.44

Step 2: Using the future value from aboveportfolio will last an additional 156 months or 13

years.

PV PMT I/Y

N

FV CPT FV

-$400000 $3000 5%/12=.4167% 11*12=132

? $165992.44

PV -$165992.44 PMT $1450

I/Y 5%/12=.4167% N?

FV 0

CPT N %uF0BB 156 months

4. Yes prices will double by the time he is 80 years old. Using the Rule of 72 you determine that at 3% inflation it takes 24

years for prices to double. The can of soda will cost $2.43 in 30 years assuming 3% annual inflation.

as the new present value calculates that Doug%u2019s

Factor Table A solution PV $1 PMT n/a

(FVIF3%30) 2.427 FV $2.43

Calculator solution PV -$1 PMT 0

I/Y 3% N 30 FV ? CPT FV $2.43