Sample question Assignment

Example -- 1

So how long will it take until you’re a millionaire?

The number of millionaires in the country is growing. The U.S. has more than 10 million. Despite the European debt crisis and worries about the U.S. economy, a May 2011 report from the Deloitte Center for Financial Services projects that the number of millionaire households in the U.S. will more than double to 20.5 million in 2020, with combined wealth of $87 trillion, up from $39 trillion in 2011.

If you start with an initial $10,000 investment and your portfolio grows by 5% every year, how much do you need to save each month to reach $1M by age 70? Solve this for me assuming I am 30 years old and then for yourself.

Let’s assume I am 30 years old!

Timeline

30 31 32 33… … …… ……… ……………….70

$10,000 …………………………………………….

Figure out how much $10,000 is worth at age 70

Then deduct that amount from $1,000,000

Then figure out the monthly payments to save to reach the desired goal

Answer: Monthly payments of $609.17

Example 2

Your parents will retire in 18 years. They currently have $250,000 and they think they will need $1M at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

Example - 3

You want to buy a car, and a local bank will lend you $20,000 for 5 years and the interest rate is 5%. What are the monthly loan payments?

Example – 4

You are about to complete your last year in business school and then you plan to go to law school, you will need $10,000 per year for 4 years, starting next year. Your rich uncle offers to put you to through school and he will deposit in a bank paying 3% interest on a sum of money that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made today. How large must the deposit be today?

Example -- 5

In six years, your daughter will be going to college. You wish to have a fund that will provide her with $10,000 per year (end of year) for each of her four years in college (i.e. $10,000 at periods 7, 8, 9 and 10). How much must you put into that fund today if the interest rate is 10%.

Example -- 6

Value is driven by PV of cash flows for organizations for products sold and resources employed. In other words, organizations have to manage Accounts Receivable vs. Accounts Payable well.

Compare the following two options at 5% interest rate

Option 1 – The Mountainside Hospital has an Accounts Payment in period 1 of $15,000 and then they expect an Accounts Receivable in period 3 of $23,000, what is the PV of these cash flows?

0 1 2 3

-$15,000 +$23,300

PV = ?

Option 2 – The hospital delays A/P of $15,000 until period 3 and they receive A/R of $23,000 in period 1, what is the PV of these transactions?

0 1 2 3

+$23,000 -$15,000

PV = ?

Which option yields better outcome?

1