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_Part-One Planning Basics Case Application TIME VALUE OF MONEY Richard e-mailed that he and Monica differed about the impact of his extra spending...

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_Part-One Planning Basics Case Application TIME VALUE OF MONEY Richard e-mailed 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 greater and asked that they compute it. They were offered an investment of $20,000 that would pay $70,000 in 20 years. They want to know if they should take it. Finally, there is an annnity tbat Richard could sign up for 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 retorn on investments is 7 percent after tax. Case Application Questions 1. Calculate what the $3,000-per-year deficit, had it been invested, would have amounted to at the end oftbe 15-year period. 2. Explain to Richard what compounding is and how it affected the cumulative amount received in question 1. 3. Calculate the retorn on the proposed $20,000 investment and indicate the factors enter ing into your recommendation to accept or reject it. 4. Indicate the expected retorn on the annuity and whether it should be accepted or rejected. 5. Construct an explanation of 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 commu nicate the time value information to Richard and Monica. ialjJIJijlll!l<mts are payments received or given tbat increase by percentage each year. cOl! nt{>erc:entage will often be linked to the infla,jj.<i rate, with other potential figures includ:ing< ra:te of growth:in a f"rnanciallnvesn I!E or in salary. Savings is a good example of how we use serial payments As you will see in the example below, develop:ing a re :: sum over ann;,,;?p .e!riod by saving a constant amount each year may not be b our salaries go up over time, mak:ing it more practical to save an iJ' : :t as we continue to work. Serial payments are a method of handling such a Another example is a gr<lwi!Jo!!'"'armuio/e amount we receive as an annuity may increase at a cent increase in payout ion the effect of iJ' rlla. ll. "'"''CIJ;IIf"" the real retorn. Use the formula given earlier: RR = ( i:; -1) X 100 Percentage value should be converted to decimal value.
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solution for time value of money.doc

Per year amount spent = 3,000
No of period (year) = 15
Rate of return = 7% (annual – compounded annually)
If the aforesaid amount invested per year for 15 years, the total amount at end of 15...

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