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Financial Management Accounting

It’s Better Late than Never


Group Case # 3
September 22, 2018

Submitted to:
Felix D. Cena, CPA, PhD

Submitted by:
GROUP 1
Kevin Camato
Hanah Feria
Dorothy Gatoc
Jacob Jereza
RG Lucero
Janice Tanongtanong

Saturday, 2:00PM – 5:00 PM


1. What was Ryan’s starting salary? How much could he have contributed to the voluntary

savings plan in his first year of employment?

RATE NPR FV PV CONTRIBUTION TO SAVINGS PLAN

PV=C/(1+r)n PV x 11%

5% 5th year 70,000.00 66,666.67 7,333.33


5% 4th year 70,000.00 63,492.06 6,984.13
5% 3rd year 70,000.00 60,468.63 6,651.55
5% 2nd year 70,000.00 57,589.17 6,334.81
5% 1st year 70,000.00 54,846.83 6,033.15

Based on the table above, Ryan’s starting salary was $54,846.83. If he had contributed

voluntarily on the savings plan on his first year of employment, he could have already contributed

$6,033.

2. Had Ryan taken advantage of the company’s voluntary retirement plan up to the

maximum, every year for the past five years, how much money would he currently have

accumulated in his retirement account, assuming a nominal rate of return of 7%? How much

more would his investment value have been worth had he opted for a higher risk alternative

(i.e. 100% in common stocks), which was expected to yield an average compound rate of return

of 12% (A.P.R.)?

Type of Rates Rates Maximum Plan FV Factor FV amount


Nominal Rate of Return @ 7% Nominal Rate 12,000.00 5.75074 69,008.87
Average Compound Rate @ 12% APR 12,000.00 6.35285 76,234.17
DIFFERENCE 7,225.30
Based on the table above, Ryan would most likely have a $69,008.87 savings already if he

had opted to contribute on their voluntary retirement plan since his first year of work. If he had

been more aggressive, his savings with a higher return of 12% is $76,234.17. The difference of

$7,225.30 is the product of higher return rate. A higher rate means a higher return and a higher

risk.

3. If Ryan starts his retirement savings plan from January of next year by contributing the

maximum allowable amount into the firm’s voluntary retirement savings program, how much

money will he have accumulated for retirement, assuming he retires at age 65? Assume that

the rate of return on the account is 7% per year, compounded monthly and that the maximum

allowable contribution does not change.

Retirement Age 65
Current Age 27
Years of investment 38

Annual Contribution 12,000.00


Annual Rate of Return 7.0%

((1 + annual rate of return)years of investment)-1


FV factor of ordinary annuity =
annual rate of return
((1+7%)38)-1
FV factor of ordinary annuity =
7%

FV factor of ordinary annuity= 172.5610

Accumulated savings at retirement age= Annual Contribution x FV Factor of Ordinary


Annuity
Accumulated savings at retirement age= 2,070,732.24
As shown above, Ryan’s savings would total to $2,070,732.24 at the age of 65 if he will

start saving on January next year.

4. How much would Ryan have to save each month, starting from the end of the next

month, in order to accumulate enough money for his wedding expenses, assuming that his

investment fund is expected to yield a rate of return of 7% per year?

Rate of return 7%
Period 12 months

Wedding Expenses at present 15,000.00


x FV Factor 1.07
Wedding Expenses 16,050.00
÷ FV Factor, ordinary annuity 12.3926
Monthly Contribution 1,295.13

Since the value of the money now will be different next year, the %15,000 of Ryan today will

be %16,050 next year. With that, he needs to save $1,295.13 every month for the whole year for

his wedding expense in order to arrive with the amount of %16,050.

5. If Ryan starts saving immediately for the 20% down payment on his house, how much

additional money will he have to save each month? Assume an investment rate return of 7%

per year.

Cost of New House 250,000.00


Down Payment Rate 20%
Down Payment 50,000.00

Down Payment 50,000.00


FV factor 1.4025
Value in 5 years 70,125.00

Rate of return 7%
5 years
Term
Monthly

FV Down Payment 70,125.00


÷ FV factor, annuity due 72.0105
additional money to be saved each month 973.82

Ryan would have to save $973.82 monthly in a span of 5 years in order to pay the 20%

down payment for his dream house.

6. If Ryan wants to have a million dollars (in terms of today’s dollars) when he retires at

age 65, how much should he save in equal monthly deposits from the end of the next month?

Ignore the cost of the wedding and the down payment on the house. Assume his savings earn

a rate of 7% per year (A.P.R.).

Retirement Age 65
Current Age 27
Years of investment 38

Years of investment 38
x No. of periods per year 12
Total no. of payments 456
Rate of return 7%

Value of savings at present 1,000,000.00


x FV factor 13.0793
FV of savings 13,079,271.41
÷ FV factor 2260.496403
Savings per month 5,786.02
In order for Ryan to have a million dollars on his retirement, he needs an equal deposit of

$5,786.02 every month for 38 years.

7. If Ryan saves up the million dollars (in terms of today’s dollars) by the time of his

retirement at age 65, how much can he withdraw each month (beginning one month after his

retirement) in equal dollar amounts, if he figures he will live up to the age of 85 years? Assume

that his investment fund yields a nominal rate of return of 7% per year.

Final age 85
Retirement age 65
Period, in years 20
x No. of months per year 12
Total no. of periods 240
Rate of return, annual 7.0%

PV amount 1,000,000.00
PV factor, ordinary annuity 128.9825
Monthly withdrawal 7,752.99

Savings per month (based on No. 6) 442.38


x FV factor of ordinary annuity 2260.496403
Accumulated savings at retirement age 13,079,271.41
÷ PV factor for the retirement period (20 years) 128.9825
Monthly Withdrawal 101,403.45

If Ryan is now retired, he would be able to withdraw from his savings an amount of

$101,403.45 monthly for the next 20 years of his life.

8. After preparing a detailed budget, Ryan estimates that the maximum he will be able to

save for retirement is $300 per month, for the first five years. After that he is confident that he

will be able to increase the monthly saving to $500 per month until retirement. If the account
provides a nominal annual return of 7%, how much money will Ryan be able to withdraw per

month during his retirement phase?

Maximum savings per month 300


Period, years 5
Total no. of periods 60

Maximum savings per month after 5 years 500


Period, years 33
Total no. of periods 396

Total no. of periods for savings ($300) 60


Total no. of periods for savings ($500) 396
Total no. of periods for savings, months 456

Rate of return, annual 7.0%


Rate of return, monthly (7% ÷12) 0.6%
x Retirement phase, years (85-65) 20
Total no. of periods, months 240

Year 1-5 monthly savings 300.00


x FV of ordinary annuity 71.5929
FV of initial investment 21,477.87

FV of ordinary annuity for 38 years 2,260.49640


Less FV factor of ordinary annuity for 5 years 71.5929
FV factor of year 6-38 2,188.9035
x Year 6-38 monthly savings 500.00
FV of year 6 to 38 investment 1,094,451.75

FV of initial investment 21,477.87


Add FV of year 6 to 38 investment 1,094,451.75
Accumulated savings at retirement age 1,115,929.62

Accumulated savings at retirement age 1,115,929.62


÷ PV factor of ordinary annuity - 20 years 128.9825
Withdrawal per month 8,651.79
If Ryan would like to have a savings of 300 per month for the first 5 years and then $500

on the 6th year until his retirement, he would need Ryan would be able to withdraw $8651.79

per month during his retirement phase of 20 years.

9. What is the lesson to be learned from this case? Explain.

The value of money changes every time. Your money now will not be of the same value

tomorrow. With that, you must learn to save for a retirement plan as early as possible. By the

time you retire, your investment or savings can increase immensely, allowing not only you but

also the rest of your family to be able to live comfortably while retired. Retirement is one of the

most important life events. It’s an achievement of a life full of sweat and tears. From both a

personal and financial perspective, realizing a comfortable retirement is an incredibly extensive

process that takes sensible planning and years of persistence