Exercise #1

Exercise #1 - Finance 351 Financial Management Instructor...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 1 Chapter 5 The Time Value of Money Minicase Old Alfred Road has reached his seventieth birthday and is ready to retire. He has accumulated $180,000 in his investment portfolio with a 9% return annually. Mr. Road also has $12,000 in a savings account at 5% interest per year. He wants to keep the savings account intact for unexpected expenses or emergencies. He will also receive $750 per month in Social Security payments for the rest of his life. These payments are indexed for inflation. That is, they will be automatically increased in proportion to changes in the consumer price index. Suppose Mr. Road will live for 20 more years and is willing to use up all his investment portfolio over that period. How much can he afford to spend per month if inflation rate will be zero? Assume that the investment portfolio continues to yield at 9% rate of return, the interest rate on his savings account will stay at 5%, and return and interest are compounded annually. How much can he afford to spend per month if inflation rate will be 4%? Mr. Road wants his
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This note was uploaded on 11/18/2011 for the course FIN 351 taught by Professor Li during the Fall '09 term at S.F. State.

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Exercise #1 - Finance 351 Financial Management Instructor...

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