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Hello,

If you could explain in detail how to solve the following problem so I may be able to solve similar problems in the future, that would be much appreciated. If it's possible to use a couple of equations without having to sum up equations in excel, that would be ideal.

Your uncle developed a new video game franchise and left the rights to you. Under current copyright law, your intellectual property is protected for 95 years. You expect that the profits from the franchise will be $1 million in its first year and that this amount will grow at a rate of 5% per year during the life of the copyright. Assume each year’s profits are received at the end of the period. Further assume that once the copyright expires, imitations and knockoffs will drive the profits from the intellectual property to zero. What is the present value of the video game franchise if the interest rate is 9% per year?

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Jean Keeling
Jean KeelingLv2
28 Sep 2019

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home / study / business / finance / finance questions and answers / question 1 (20 marks) (show all workings) this question relates to material covered in the ...

Question: Question 1 (20 marks) (show all workings) This question relates to material covered in the Topic ...

Question 1 (20 marks) (show all workings)

This question relates to material covered in the Topic 3 on Financial Mathematics. This question addresses the 6th subject learning outcome.

a. A couple wants to accumulate $10,000 by making payments of $800 at the end of each half year into a savings account that earns interest of 10% per annum. Find the number of full payments required and the size of the concluding payment.

b. A woman wins $200,000 in a lottery. She takes only $20,000 in cash and invests the balance at a rate of interest of 10% with the understanding that she will receive 180 equal monthly payments, with the first one to be made in 4 years. Find the size of the payments.

c. Dr.Ritz has been depositing $4,000 in her savings account every December since 2007. Her account earns 5% compounded annually. How much will she have in December 2017? (Assume a deposit will be made in the year 2017).

d. Mary Tune will receive $20,000 every year for the next 10 years as a payment for a new song she has written. If a 6.0% rate is applicable, should she be willing to sell out her future rights now for $150,000?

e. Mr. Tomas wants to buy an annuity of $1,000 a year for 10 years that is protected against inflation. The ABC Trust Company offers to sell him an annuity where payments increase each year by exactly 10%. Find the cost of this annuity if the rate of interest is 12% per annum.

John is an attorney in a small firm, he is 32 years old and currently earning $78,000 a year. John must continue paying back his student loan by making monthly payments of $300 per month for the next three years at an interest rate of 5% per year. John is married and has three children, Billy, age 2. Cindy, age 6, and sally, age 10. Johns wife, Mary, currently is a stay-at-home mom. When billy is old enough to attend school, Mary hopes to get a job as an administrative assistant in the children's school. That position pays about $20,000 per year. Mary has a high school diploma and a certificate showing she completed one year of practical secretarial training. Mary is 34 years old. John and Mary pay $900 per month for their home mortgage, which will be paid off in 20 years. The interest rate on their mortgage is 4.0%. (Their current equity in the home is $36,000.) The couple own two cars, both 10 years old, and personal property (such as clothes, electronics, furniture, etc) valued at $45,000. Their investments include checking, savings, and mutual fund accounts equal to $8,000. John has no life insurance. Mary has a $25,000 whole life insurance policy that was given to her by her parents when she turned 18. If John should die, Mary would receive approximately $5,000 per year for each child 18 years of age or younger.

John and Mary spend almost all of John's take-home pay each month. They are able to save $300 per month that they deposit into a tax-deferred college fund for the children. The college fund has been earning a respectable rate of return of about 7% per year. Their other investments earn about 5% per year. John is worried about what may happen to his family if he should die. He is considering the purchase of life insurance and asks for your advice.

1) Assuming neither John nor Mary will receive large inheritances, how much life insurance do you think John needs? Calculate the amount using the needs approach. Show all calculations and explain your answer. Also indicate the type of insurance you would recommend, whole life or term. If you recommend term, specify length of the term policy.

2) Assume that John and Mary purchase a whole life policy on John's life in the amount you determined in part 1. (If the amount you determined is less than $200,000, assume an amount of $200,000) Fifteen years later, John decides he doesnt want to make any more premium payments. Which non-forfeiture option would you recommend? Explain the selection.

3) Assume that John and Mary purchase a whole life policy on John's life in the amount you determined in part 1. (If the amount you determined is less than $200,000, assume an amount of $200,000) John dies at age 55. Which settlement option would you recommend? explain your selection and note any assumptions made.

NON-EXCEL help on Growing Annuity Problem

In this problem, we will assume all cash flows occur at theBEGINNING OF THE PERIOD (Annuity Due). Therefore,you need to set the calculator to BEGIN. You maywant to review the Lecture Video on Growing Annuity for help inworking the exam.

Problem:
Assume you are 32 years old and plan to retire in 35 years at age67. You are currently earning $75,000/year and expect averageannual salary increases of 4.0%/year over the next 35 years. Youhave $0 saved for retirement.

You are trying to determine how much money to save (invest) eachyear in your 401(k) Plan to fund your retirement in order to payyourself 70% of your final salary each year (that increases withinflation). [Remember this is an Annuity Due, so your first annualinvestment is made in Year 0….and your final payment is in Year34.] You plan to maintain an investment as a percent of yoursalary, which simply means your payment into the 401(k) will alsoincrease by 4.0% per year as your salary increases 4.0% eachyear.

You believe that you can earn 8.0%/year over the next 35 yearswhile saving for retirement.

Once you retire, you have a life expectancy of 25 years. Youplan to be more conservative in your investments and expect to earnonly 5.0%/year on your investments over the 25 years while inretirement. You also want to maintain your purchasing power byincreasing your “annual retirement pay” by the expected inflationrate of 3.0% each year. [Remember, your first withdrawal will bemade in Year 0 of retirement (i.e., Year 35 on the timeline.]Assume that after you withdraw the 25th payment, you will have $0left in the account.

Instructions:
- SET CALCULATOR TO “BEGIN”!
- Set up and show your Timeline with payments. You MUST “show yourwork” in order to get partial credit.
- For this Exam it would be better to handwork the problem and saveas a pdf before submitting.
- BOX in all your ANSWERS!
- You may round all answers to the dollar throughout theproblem.
- Carry your adjusted interest rates out to 6 decimal places toreduce rounding errors.

Questions: [NOTE: there are obviously many steps to get to theseanswers…scoring is below.]
1. What is your final year’s salary?
What is 70% of your salary? [Round to the dollar.]

2. How much will you need in your 401(k) at retirement in orderto “pay yourself” 70% of your final year’s salary,
AND have that payment to yourself increase at 3.0% each year tomaintain purchasing power?

3. How much do you need to contribute each year (i.e., save,invest) over the next 35 years in order to fund your retirement.Remember, payment into the 401(k) is increasing by 4.0% eachyear.

Scoring (Do not use Excel):

1. Readability of your Exam. Is it organized, do you show allwork, are your answers BOXED in, etc. (10 points)
2. Correctly work problem as an Annuity Due (10 points)
3. Calculate the FV of salary and 70% of salary as first withdrawalfrom your 401(k) in retirement. (15 points)
4. Do you show a Timeline and is it labeled properly? (15points)
5. Calculate adjusted interest rate for Retirement Annuity section.(10 points)
6. Calculate the PVA for the Retirement Annuity. (10 points)
7. Calculate the adjusted interest rate for the saving/investingsection of problem. (10 points)
8. Calculate the adjusted FVA correctly that is used to determineamount to save each year. (10 points)
9. Calculate the amount you need to save each year; where paymentincreases as salary increases. (10 points)

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