Question

Mr. Donald Heffernan, a 35 years old account manager At Wells Fargo has gross annual income after all deductibles of $85,000. Mrs. Heffernan quit her job at Walmart to take care of their twin kids, Luke and Christine. So Mr. Heffernan is the only income earner at his house hold. Mr. Heffernan is filing income using the following "Married filing jointly" tax rate schedule. Taxable income over Not over Tax rate $0 18,450 10% 18,451 74,900 15% 74,901 151,200 25% 151,201 230,450 28% 230,451 411,500 33% 411,501 464,850 35% 464,851 39.6% 2- Mr. Heffernan's net Monthly income is: Mrs. Heffernan just won the state sweepstake. She got two options to get her prize. (1) To receive $250,000 today. Or (2) to receive a monthly payment of $2000 for 25 years period. If Mrs. Heffernan appropriate discount rate is 6%. Which option should Mrs. Heffernan go with? Mrs. Heffernan should go with option 2 since the value of the monthly payments is going to be higher than the today's prize value. n=25*12=300 310413.73 rate=0.5 pmt=2000 CPT PV= 310,413.73 Note: if Mrs. Heffernan choose to go with option 1, she will invest the $250,000 at 6% to generate monthly income for the 25 years period. The Heffernan's total monthly income is: If Mr. Heffernan can actually stick to his financial plan, how long could his retirement savings afford for his living. Assuming that his estimated annual expenses after retirements is $48000, and that his retirement savings are going to be saved in a bank accounts that earns 2%. 20.3 794,262.35 PMT=-48,000.1/Y=2%,FV=0 =20.3 Years What is the residual income that is available to Mr. Heffernan after satisfying the needs for his financial plan?

Answer 1

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Answer-

Given, Mr.Donald Heffernan's Gross annual income = $85,000 (1) Calculation of Mr.Heffernan's Net annual income: Gross annual income. $85,000 Less: Tax payable. $12,837 ($85,000-$74,901)x25%+ ($74,900-$18,451)x15%+ ($18,450x10%) Net annual income $72,163 =. (2) Calculation of Mr.Heffernan's net monthly income: Net monthly income = Net annual income-12 = $72,163-12 = $6,013.58 (3) Option for Mrs.Heffernan whether to receive $2,50,000 today or to receive monthly payment of $2,000 for 25 years Given, Discount rate = 6% Option 1: price amount that will be received today = $2,50,000 Option 2: if monthly payment received @$2,000 for 25 years with 6% discount rate Present value = $2,000x12xPVAF(6%,25) = $2,000x12x12.783 = $3,06,792 Therefore option 2 is the best, i.e., to receive monthly amount of $2,000 for 25 years as the amount received in option 2 is higher than in option 1. (4) Calculation of Monthly income of Heffernan: Monthly income of Mr.Heffernan = $6,013.58 Monthly income of Mrs. Heffernan = $2,000 Total. = $8,013.58