Assignment

1. Mrs. Reznik, who 27 years old, plans to retire at the age of 55. She is expecting a lumpsum amount (an inheritance) of $75,000 when she is 40. This lumpsum amount will be invested at 8% per year.

a. Mrs. Reznik would like to be able to withdraw $120,000 per year from her retirement account for 45 years after retirement beginning a year after her retirement. How much does she need to have in her retirement account by retirement date if the interest rate is 7% per year during the post-retirement years?

b. Suppose she already has $45,000 in her retirement investment account that earns 7.5% per year. What will be the value of this amount by her retirement date?

c. Given her goal in 2a above and the investment she already has in 2b in addition to her expected inheritance, how much does she need to invest per year (at 9% annual rate of return) beginning a year from now till retirement, in order to reach her retirement goal?

[Show the process (steps) by which you get the answers to questions 2a, b, c. In other words, write down the equations and steps you followed to get the answers. You won't get any marks by just reporting the answers (for example as provided by financial calculators).]

2. Use the information below to prepare a balance sheet and a cash flow statement for Mr. King. Calculate his net worth and cash surplus or deficit. (All expenses are on monthly basis).