Sandra Gilbert, Retiree
Case 12
Time Value of Money
Purpose: The case provides the student to a very important issue in the age of baby boomers. Although
retirement is not an issue directly affecting students, it is one in which they are likely to be called on for
advice by parents and relatives. For those students who become financial planners, the case will have
particular importance.
Relation to Text: The case should follow Chapter 9.
Complexity: The case is relatively straightforward and should require 30-45 minutes.
Solutions
1.
Retirement Funds
$400,000
Tax Rate
35%
Taxes
$140,000
Net Retirement Funds
$260,000.00
2.
Annual Funds
$35,000
Tax Rate
15%
Taxes
$5,250
A/T Income
$29,750
PV Factor for n = 20, i = 8%
9.818
NPV of Funds
$292,085.50
3.
Annual Funds
$31,000
Tax Rate
15%
Taxes
$4,650
A/T Income
$26,350
PV Factor for n = 25, i = 8%
10.675
NPV of Funds
$281,286.25
4.
Initial Payout
$200,000
Tax Rate
35%
Taxes
70,000
Net Retirement Funds
$130,000
Plus
Annual Funds (200,000/10)
$20,000
Tax Rate
15%
Taxes
$3,000
A/T Income
$17,000
PV Factor for n = 10, i = 8%
6.710
NPV of Funds
$114,070
Total Net Present Value
$244,070
5.
Option 2 has the highest NPV.
$292,085.50
6.
Option 2
A/T Income
$29,750
PV Factor for n = 20, i = 4%
13,590
NPV of Funds
$404,302.50
Option 3
A/T Income
$26,350
PV Factor for n = 25, i = 4%
15.622
NPV of Funds
$411,639.70
The lower discount rate favors the longer-term option (Option 3).