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FIN 3331 Critical Thinking Assignment

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• Published : December 16, 2014

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﻿Name: Tung Son Nguyen
ID: 1418366
(Bold letters below are my answers)
Emily Smith just received a promotion at work that increased her annual salary to \$42,000. She is eligible to participate in her employer’s 401(k) retirement plan to which the employer matches, dollar for dollar, workers’ contributions up to 5% of salary. However, Emily wants to buy a new \$25,000 car in 3 years, and she wants to have enough money to make a \$10,000 down payment on the car and finance the balance. Fortunately, she expects a sizable bonus this year that she hopes will cover that down payment in 3 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 medical school. In addition, Emily and Paul want to buy a home of their own in 5 years. This might be possible because two years later, Emily will be eligible to access a trust fund left to her as an inheritance by her late grandfather. Her trust fund has\$80,000 invested at an interest rate of 5%. 1. Justify Emily’s participation in her employer’s 401(k) plan using the time value of money concepts by calculating the actualannual return on her own contributions. She will contribute \$1,000 per year to her 401(k) for 25 years and the employer will match dollar for dollar. Assume that her 401(k) earns 6% per year for 25 years and all contributions are made at the end of each year. The formula that we applied here is FVAN = PMT * [(1+I)N -1]/I In this case,

PMT = 1,000 (Emily’s contribution) + 1,000 (matching from employer) = 2,000 USD I = 0.06
N = 25
The result is FVA25 = 109,729 USD
2. Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the down payment on a new car, assuming she can earn 4% on her savings. What if she could earn 10% on her savings? The formula we applied here is PMT = FVAN * I /[(1+I)N -1]

In the first case,
FVA3 = 10,000 USD
I = 0.04
N = 3
The result is PMT = 3,141 USD. However, since this payment includes the employer’s matching which is equal to Emily’s contribution, Emily needs to set aside 3,141/2 = 1570.5 USD.

In the second case,
FVA3 = 10,000 USD
I = 0.1
N = 3
The result is PMT = 3,021 USD. However, since this payment includes the employer’s matching which is equal to Emily’s contribution, Emily needs to set aside 3,021/2 = 1510.5 USD.

3. What will be the value of Emily’s trust fund in 36 years, assuming she takes possession of \$20,000 in 2 years for her wedding, and leaves the remaining amount of money untouched where it is currently invested? After 2 years, the balance of the trust fund is 80,000*(1+0.05)2 – 20,000 = 68,200 USD. After Emily’s wedding, the trust fund in the next 34 years is 68,200*1.0534= 358,278 USD. 4. Suggest at least two conditions that Emily and Paul could take to accumulate more for their retirement. Firstly, Emily and Paul should invest her salary more in 401(k) plan. Currently, Emily only invests 1,000 USD per year, which is 2.38% of her yearly salary. However, employer can matches worker’s contribution dollar for dollar up to 5% of annual salary and Emily needs to take full advantage of this. Secondly, Emily should withdraws money from her trust fund to invest in her 401(k) plan since the trust fund has only 5% return while the 401(k) plan has 6% return per year. 5. Suppose that Emily and Paul purchase a \$200,000 home in 5 years and make \$40,000 down payment immediately. Find the monthly mortgage payment assuming that the remaining balance is financed at a 3% fixed rate for 15 years. What if its mortgage term is 30 years? The balance Emily needs to cover in the next 15 years is 200,000-40,000=160,000 USD. The monthly charge on the balance is 3/12=0.25% = 0.0025

The number of periods is 15*12=180 months
The monthly payment is PMT = 160,000 / = 1,104.93 USD
If the term is 30 years, the number of periods is 30*12=360 months The monthly payment is PMT = 160,000 / = 674.57 USD
6. What...