Elliot makes $250,000 a year and pays 30% taxes on $150,000 and 35% on his remai
ID: 2753486 • Letter: E
Question
Elliot makes $250,000 a year and pays 30% taxes on $150,000 and 35% on his remaining salary. His expenses are $110,000 (per year). He wants to invest a fixed amount EVERY day into an investment fund for 5 years and he hopes to get a 12% return.
A.What is the maximum amount he can invest every day?
B.What will be the worth of his portfolio after 5 years?
C. After 5 years, Kassidy’s income increases to $300,000. He wants to reinvest for another 5 year, but this time, his return will be 10% and his expenses have increased by 15%. What will be the worth of his portfolio after 5 years (total of 10 years)?
D. What will the Present Value of his portfolio, assuming a 6% discount rate and NPER is 10 years
Explanation / Answer
Total Income = $250,000
Total Tax = ($150,000 * 30%) + ($100,000 * 35%) = $80,000
Total Expenses = $110,000
Residual Income for investment = $250,000 - $110,000 - $80,000 = $60,000
Maximum Amount can be invested everyday = $60,000 / 365 = $164.38
Worth of portfolio after 5 years =
[Investment per year] * [(1 + interest rate per period) ^ number of periods – 1 / interest rate per period]
= [$60,000] * [ (1 + 0.12)5 – 1 / 0.12] = $60,000 * 6.352847 = $381,170.8
New Income = $300,000
New Tax = ($150,000 * 30%) + ($150,000 * 35%) = $97,500
New Expenses = $110,000 + 35% of $110,000 = $126,500
New Residual Income = $300,000 - $126,500 - $97,500 = $76,000
Worth of portfolio created by new income =
= [$76,000] * [ (1 + 0.10)5 – 1 / 0.10] = $76,000 * 6.1051 = $463,987.6
Worth of the portfolio created earlier = (This investment will be treated as a fixed deposit as it will be deposited on the very first day of the investment)
A = ( P * (1+r)n )
=[$381,170.8 * (1+.10)5] = $624,592
So, total worth at the end of 10 years = $624,592 + $463,987.6 = $1,088,579
PV = FV / (1+r)n.
= $1,088,579 / (1+.06)10
= $607,856.83
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