User Account

All Pages

FIR 3410, Finance Basics

Assignment Help:
Your client, a man, is currently 35 years old and he wants to retire when he is 65 years old (exactly 30 years from now). He would like his retirement income to be equivalent to $6,000 per month, adjusted for inflation. You estimate that inflation rate for the next 30 years to average 3% annually. He anticipates purchasing a guaranteed retirement annuity form an insurance company the month before he retires (359 months from now). The insurance company will use the actuarial life expectancy table below to determine the cost of the annuity. As you can see, he is expected to live about 16 years (s, he should expect to purchase a 193 month annuity) following retirement. They will add a 4% premium to the pure premium calculated from their actuarial table. He has a $25,000 in savings today that will be invested until he retires. Given a rate of return of 6% (annually but compounded monthly) for the foreseeable furture for both your client and the insurance company, how much does he need to save each month (359 months) for the next 29 years and 11 months (first payment to be made in one month) if he is to aford to purchase the annuity contract? (assume that you make the last month payment in 29 years and 11 months, the month before you receive your first monthly retirement payment.)

Period LIfe Table, 2011
Male Female
Death Probability Number of Lives Life expectancy Death probability Number of Lives LIfes expect
60 0.012405 84,642 19.81 .007732 90,821 23.11
61 0.013589 83,592 19.05 .008497 90,119 22.28
62 0.014840 82,456 18.31 .009318 89,353 21.47
63 0.016149 81,232 17.57 .010192 88,521 20.67
64 0.017547 79,920 16.85 .011138 87,618 19.88
65 0.019102 78,518 16.15 .012199 86,642 19.09
66 0.020847 77,018 15.45 .013384 85,642 18.32

1) What dollar amount will be needed per month at retirement age? (Hint: you want the equivalent to 6,000 per month when you retire; however, inflation will be 3% over the next 30 years! So you want to calculate the FV in 30 years.)

2) Okay, in part 1 you calculated the monthly dollar amount needed for retirement. Now you need to determine what the PV of this stream of retirement income will be (one month before retirement). Hint: THis will be the PVA of the stream of monthly retirement income - fromt part 1 - for 193 months. Remember this PV is in the future when you are ready to retire.)

3) What will hte price of this annuity? (Hint: This next step is easy - you need to determine what this annuity will cost. The figure you arrived at in part 2 is the pure premium. Now you need to increase this by the amount the insurance company adds to the pure premium.)

4) What is the future value of your client''s savings in 359 months when he plans to retire? (Hint: Your client has savings - what will these be worth in the future?)

5) What is the new total amount needed by month 359 when he plans to retire? (Hint: This is easy to calculate - - it is the amount from 3 minus the figure determined in 4.)

6) How much needs to be saved monthly so you will have sufficient savings to purchase this annuity from the insurance company? (Hint: You need to solve for the annuity amount. You know the FVA, the interest rate, number of periods.)

Finance

Related Discussions:- FIR 3410

Proforma balance sheet, Proforma Balance Sheet This refers to the proj...

Proforma Balance Sheet This refers to the projected balance sheet at the finish of forecasting period.  The items in the proforma balance that vary with sales would be determi

Required Return.., Valuing Preferred Stock Gest, Inc has an issue of prefer...

Valuing Preferred Stock Gest, Inc has an issue of preferred stock outstanding that pays a $4.50 dividend every year in perpetuity. If this issue currently sells for for $79.85 per

Insurance, new features of insurance?

new features of insurance?

Risk-return trade-off, Risk-Return Trade-Off Most financial decisions ...

Risk-Return Trade-Off Most financial decisions comprise alternative courses of action. The choices have different returns and risk.  As like example, must we buy a replacement

Different risk-profile - shareholders and management, Different Risk-profil...

Different Risk-profile - Shareholders and Management Shareholders will generally prefer high-risk-high return investments while they are diversified that is they have many inv

Accounts payable turnover ratio, Accounts Payable Turnover Ratio Ratio...

Accounts Payable Turnover Ratio Ratio for Account Payable Turnover is as Follow: Creditors/accounts payable turnover = Annual credit purchases /Average creditors

Cash cycle and cash turnovers, Cash Cycle and Cash Turnovers Cash Cycl...

Cash Cycle and Cash Turnovers Cash Cycle refers to the amount of time which elapses from the point whenever the firms create a cash outlay to purchase raw materials to the poi

Functions of capital markets, Functions of Capital Markets Functions o...

Functions of Capital Markets Functions of Capital Markets are as: 1. Providing long term funds that are essential for investment decisions. 2. Provide advices to investo

Calculate the weighted average cost of capital, Company XYZ stock is consid...

Company XYZ stock is considering the two new projects, Project A and Project B. The two projects have similar risk characteristics as the existing business. The managers forecast t

Systems and subsystems, SCENARIO You have just moved out of home and have ...

SCENARIO You have just moved out of home and have a part-time job that pays you $18 per hour after tax (you work 20 hours a week). You also have $5000 in a savings account. You

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd