Elliot makes $250,000 a year and pays 30% taxes on $150,000 and 35% on his remai

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. (20 PTS)

A. What is the maximum amount he can invest every day? (5 PTS) (Find the annual investment amount and divide by 365).

B. What will be the worth of his portfolio after 5 years? (5 PTS)

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)? (5 PTS)

D. What will the Present Value of his portfolio, assuming a 6% discount rate and NPER is 10 years? (5 PTS)

Explanation / Answer

A. Total tax paid = 30% * 150000 + 35% * 100000 = 45000 + 35000 = 80,000

So total savings per year = Income - expenses - tax = 250000 - 110000 - 80000 = 60,000

Maximum he can invest per day = 60,000 / 365 = $164.38

B. Portfolio worth can be calculated as follows

Worth = FV(12%/365,5*365,-164.38,0,0) = $410,960.66

C. From year 6 his investment increases every day by following

Total tax paid = 30% * 150000 + 35% * 150000 = 45000 + 52500 = 97,500

So total savings per year = Income - expenses - tax = 300000 - 110000 * 1.15 - 97500 = 76,000

Maximum he can invest per day = 76,000 / 365 = $208.22

Worth of portfolio after 10 years = FV of year 5 worth + FV of new investment for 5 years

Worth of portfolio after 10 years = FV(10%,5,0,-410960.66,0) + FV(10%/365,5*365,-208.22,0,0)

Worth of portfolio after 10 years = $661,856.26 + $492,944.31 = $1,154,800.56

D. Present value of $1,154,800.56 can be calculated as follows

=PV(6%,10,0,-1154800.56,0) = $644,834.60

Note: cash inflows and outflows have to be entered with opposite signs in an excel sheet

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