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Mini-case:Emily Dao, 27, just received a promotion at work that increased her annual salary to $74,000. In addition to standard compulsory employer superannuation, she is eligible to participate in her employer’s retirement savings plan, to which the employer matches, dollar for dollar, worker’s compensation contribution of up to 5% of salary. However, Emily wants to buy a new $50,000 car in three years, and she wants to have enough money to make a $14,000 deposit on the car and finance the balance. Fortunately, she expects a sizeable bonus this year that she hopes will cover that deposit in three years. A wedding is also in her plans. Emily and her boyfriend, Paul, have set a wedding date two years in the future, after he finishes his medical degree. In addition, Emily and Paul want to buy a home of their own as soon as possible This might be possible because at age 30 Emily will be eligible to access $100,000 trust fund left to her as inheritance by her late grandfather. Her trust fund is invested in 7% government bonds.
a. Justify Emily’s participation in her employer’s retirement savings plan using the time-value-of-money concepts by explaining how much an investment of $20,000 will grow to in 40 years if it earns 10% annual interest.
b. Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the deposit on a new car, assuming she can earn 6% annual interest on her savings. What will happen if she could earn 10% annual interest on her savings?
c. What will be the value of Emily’s trust fund at age 60, assuming she takes possession of half of the money ($50,000 of the $100,000) at age 30 for a house deposit, and leaves the other half of the money untouched where it is currently invested?
d. What is the relationship between discounting and compounding?
List at least two actions that Emily and Paul could take to accumulate more for their retirement (think about i and n)?Mini-case:Emily Dao, 27, just received a promotion at work that increased her annual salary to $74,000. In addition to standard compulsory employer superannuation, she is eligible to participate in her employer’s retirement savings plan, to which the employer matches, dollar for dollar, worker’s compensation contribution of up to 5% of salary. However, Emily wants to buy a new $50,000 car in three years, and she wants to have enough money to make a $14,000 deposit on the car and finance the balance. Fortunately, she expects a sizeable bonus this year that she hopes will cover that deposit in three years. A wedding is also in her plans. Emily and her boyfriend, Paul, have set a wedding date two years in the future, after he finishes his medical degree. In addition, Emily and Paul want to buy a home of their own as soon as possible This might be possible because at age 30 Emily will be eligible to access $100,000 trust fund left to her as inheritance by her late grandfather. Her trust fund is invested in 7% government bonds.
a. Justify Emily’s participation in her employer’s retirement savings plan using the time-value-of-money concepts by explaining how much an investment of $20,000 will grow to in 40 years if it earns 10% annual interest.
b. Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the deposit on a new car, assuming she can earn 6% annual interest on her savings. What will happen if she could earn 10% annual interest on her savings?
c. What will be the value of Emily’s trust fund at age 60, assuming she takes possession of half of the money ($50,000 of the $100,000) at age 30 for a house deposit, and leaves the other half of the money untouched where it is currently invested?
d. What is the relationship between discounting and compounding?
List at least two actions that Emily and Paul could take to accumulate more for their retirement (think about i and n)?
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