Question

d) Which option should Sue take? As part of your response you must explain why the option you select is the better of the two alternatives. (2 marks) Note: In order to achieve full marks for this question it is essential that you fully explain what you are doing, why you are doing it and the steps involved in providing a final solution. Ensure your answer is not just a set of calculations as 25% of the marks for this question are set aside for your explanation and presentation. Presentation Explanation Response 26 Total Marks 34 Question 1 Question 2 - Superannuation Tom White has just started work at 18 years of age and intends to retire at 55. He will be saving $150 per month during his working life. He invests his money in a superannuation fund paying 8.5% p.a. compounding half- yearly a) How much will he have in this fund when he retires? Provide a clear explanation of why you think this is a future/present value annunity question. (4 marks) b) On retirement, Tom rolls this money over into an allocated pension paying 6.4%p.a. compounding fortnightly. Calculate how much per fortnight he could withdraw, if the pension were to last 15 years. (3 marks) c) What is the outstandarding balance after 10 years? (2 marks) d) If an emergency withdrawal of an extra $25,000 was needed at the end of the 5th year, what effect would that have on how long the annuity would last? (4 marks) EXCEL Instructions: Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make annuity calculations. Note: In order to achieve full marks for this question it is essential Oi why you are doing it and the steps involved in providing a final solution. Ensure your answer is not just a set of calculations as 25% of the marks for this question are set aside for your explanation Response Presentation Explanation Total Marks 15 Question 2 11

Answer 1

a). Tom plans to retire at 55 years of age and the retirement fund value at that time, has to be calculated. So, this is a future value of annuity question.

Annual rate = 8.50%, so semi-annual rate = 8.50%/2 = 4.25%

Effective monthly rate = [(1+4.25%)^(1/6)] -1 = 0.6961%

PMT = 150; N (number of deposits) = (55-18)*12 = 444; rate = 0.6961%, solve for FV. FV = 447,312.94

Retirement fund, at the time of retirement will equal 447,312.94

b). Annual rate = 6.4%, so fortnightly rate = 6.4%/26 = 0.2462%

PV = 447,312.94; rate = 0.2462%; N (number of withdrawals) = 15*26 = 390, solve for PMT.

Fortnightly withdrawal = 1,785.57

c). Outstanding balance after 10 years:

PV = 447,312.94; PMT = 1,785.57; N = 10*26 = 260; rate = 0.2462%, solve for FV.

Outstanding balance = 198,440.46

d). Balance left after 5 years:

PV = 447,312.94; PMT = 1,785.57; N = 5*26 = 130; rate = 0.2462%, solve for FV.

Outstanding balance = 342,594.47

Balance after 25,000 is withdrawn = 342,594.47 - 25,000 = 317,594.47

PV = 317,594.47; PMT = 1,785.57; rate = 0.2462%, solve for NPER.

Number of withdrawals which can be made = 234.27

or 234.57/26 years = 9.01 years.

Withdrawals can be made for 9.01 years more.