Financial Decision Making Coursework Example

Financial Decision-Making
Your Name (First M. Last)
School or Institution Name (University at Place or Town, State)
Financial Decision-Making
Case 1
In this case, the PVs (present value) of both costs and benefits must be equal. As a result, we will divide this into 2 segments, the benefits and the costs. Here, costs are the deposits, a 30-year annuity with the first deposit made in a year:
PV costs: (C / 0.08) * {1 – 1 / (1.08)30}
And the withdrawals she is going to make after her retirement, is a 20-year annuity paying $ 90,000 each year with the first withdrawal being made after 31 years. So, in 30 years, this annuity will value:
PV 30: (90,000 / 0.08) * {1 – 1 / (1.08)20}
= 1125000 * 0.79
= $ 883,633.27
This is also the amount needed at retirement. The same amount will be used to answer all the other questions of this case. Moreover, we will discount this value for 30 years to know the PV of the benefits.
PV benefits: $ 883,633.27 / 1.0830
= $ 87813.12
As the PVs (present value) of both costs and benefits must be equal, so the calculation is as follows:
$ 87813.12 = (C / 0.08) * {1 – 1 / (1.08)30}
= $ 7,800.21
To answer this question, first we determined the amount she would need at retirement. And then we discounted that amount by 8% for 30 years, which is: $ 87813.12. This should be the one lump sum deposit she can make today.
To solve this problem, we will first breakdown each component in the following way –
Future value of the employer’s annual input at retirement = $ 169,924.

82
Future value of the trust fund at the time of retirement = $ 53,973.12
Therefore, the revised amount to save every year based on these conditions (using the annuity formula) would be = $ 5,823.77
Case 2
Age certainly affects Ben’s decision. He completed his college degree when he was 22 and he has been working for the last 6 years. That should give him enough time to save some money for his post-graduation degree. Assuming he can finish his MBA in 2 years, then Ben will have 40 more years working better jobs (due to his MBA degree), which will sufficiently recover his investment for the MBA and will also provide enough money for his retirement.
Non quantifiable factors: Ben’s age and health, the school’s reputation, commutation, family responsibilities, suggestions given by acquaintances and reputable sources, and modern trends in career development.
Option 1: For continuing his current job, the NPV of the cash inflow is –
{65,000/0.063 – 0.03)} * {1 – (1.03/1.063)40} * (1 – 0.26)
= 1969696.97 * 0.72 * 0.74
= $ 1049454.55
Option 2: For attending Wilton University, the NPV is = $ 1477419.832
Option 3: For attending Mount Perry College, the NPV is = $ 1311013.11
So, attending Wilton University is the best option for Ben.
Ben’s belief is not correct. We must calculate how much a future amount is worth today to find out its actual value. That is why most of the investment analysis methods use proper discount rates to find out the present value or the net present value of the investment.
The initial salary must be $ 83,909.99 for making him indifferent between options 1 and 2.
The 5.4% interest rate will increase his total costs to pursue his MBA degree at either university. Therefore, this change in the interest rate is not that much significant for Ben to change his decision of attending the Wilton University.