MINICASE As an investment advisor, you have been approached by a client called Ramesh, who wants Ramesh is currently 45 years old and has 600,000 in the bank. He plans to work for 15 money and retire at the age of 60. Ramesh's present salary is 400,000 per year. He expects his salary Ramesh has decided to invest his bank balance and future savings in a portfolio in which stocks bonds would be equally weightede og helike thai mpiasty, auld pe that these proportionery maintained by him throughout Henlearbelin his that bond would provide a return of 7 percent Once Ramesh retires at the age of 60 he would like to withdraw 500,000 per year from his inu ments for the following 15 years as he expects to live upto the age of 75 years. He also wants to bequem 1,000,000 to his children at the end of his life. How much money would he need 15 years from com How much should Ramesh save each year for the next 15 years to be able to meet his investme: objectives spelt out above? Assume that the savings will occur at the end of each year. Suppose Ramesh wants to donate 200,000 each year in the last three years of his life to a charitable cause. Each donation would he made at the beginning of the year. How much money would he need when he reaches the age of 60 to meet this specific need? Ramesh recently attended a seminar on human capital where the speaker talked about a person's human capital as the present value of his life time earnings. Ramesh is curious to find out the prese value of his lifetime salary. For the sake of simplicity assume that his present salary of 400,000 will paid exactly one year from now, and his salary will be paid in annual installments. What is the prese value of his life time salary, if the discount rate is 8 percent? Remember that Ramesh expects his sala to increase at the rate of 12 percent per year until his retirement. In answering the above questions, ignore the tax factor.
1). Amount Ramesh would require 15 years from now = present value (PV) of annual withdrawal of 500,000 for 15 years + PV of 1,000,000 bequeath at the end of 15 years
Total return on the portfolio = (stock return + bond return)/2 = (13%+7%)/2 = 10%
PV of annual withdrawal = 500,000*[1 -(1+10%)^-15]/10% = 3,803,039.75
PV of bequeath at the end of 15 years = 1,000,000/(1+10%)^15 = 239,392.05
Total amount required = 3,803,039.75 + 239,392.05 = 4,042,431.80
2). Amount to be saved per annum to meet the retirement objective:
future value (FV) of 600,000 in 15 years + FV of amount A saved p.a. for 15 years = 4,042,431.80
600,000*(1+10%)^15 + A*FV factor (10%, 15) = 4,042,431.80
A = (4,042,431.80 - 600,000)/FV factor = 3,442,431.80/31.772 = 108,346.33 (amount to be saved per annum)
3). PV of 200,000 p.a. for the last 3 years of his life:
PMT = 200,000; N = 3; rate = 10%; Type = 1 (annuity paid at the beginning of the year), solve for PV.
PV when Ramesh is 72 years old = 547,107.44
So, amount required at the age of 60 years = 547,107.44/(1+10%)^12 = 174,325.29
4). PV of life time salary is a growing annuity @ a growth rate of 12% p.a.:with a discount rate of 8%
PV of lifetime salary = 7,254,962.02