QUESTION 7 Questions 7 to 10 Some of the SchoolStreet employees would be retirin

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QUESTION 7

Questions 7 to 10

Some of the SchoolStreet employees would be retiring in the near future and SchoolStreet needs to recruit 2 new employees as the business has grown. Caleb has to figure out the value of the SchoolStreet pension fund and educate the new recruits how to plan their retirement savings.

Caleb estimates that the pension fund SchoolStreet sponsored will make a $5 million contribution five years from now. The rate of return on plan assets has been estimated at 8 percent per year. Caleb wants to calculate the value of this contribution 15 years from now, which is the date at which the funds will be distributed to company’s retirees. The future value of pension fund Caleb calculated is close to?

$7,346,640

$15,974,640

$10,794,620

1 points   

QUESTION 8

Celestila Moonn lives in Russia and expects to earn 50,000 Ruble (RUB) this year and would like to spend RUB 45,000 on current consumption (she plans to save the remaining RUB5,000). Unexpectedly, Moonn gets an opportunity to invest RUB10,000 in a project that will repay RUB13,000 in one year. If the current interest rate is 10%, should Moonn take this investment even though she had planned to save only RUB5,000.

No.

No, because Russian Ruble depreciated 30% last month and Moonn will realize a loss from this isnvestment.

Yes.

1 points   

QUESTION 9

Moon’s friend, lives in Greece and planning on moving to Germany, owns a perpetuity that promises to pay €1,000 at the end of each year, forever. Moon received an e-mail from her friend and she offered to sell Moon all of the payments to be received after the 25th year for a price of €1,000. At an interest rate of 10%, should Moon pay the €1,000 today to receive payment numbers 26 and onwards?

No, the perpetuity is worth today for €923

Yes.

No, the perpetuity is worth today for €9,077

1 points   

QUESTION 10

Caleb prepared the following hypothetical retirement savings example to deliver while he will be meeting with his company’s new recruits.

Moonn is 24 year old and the expected retirement age is 68 and her life expectancy is 93 years. Her current annual expenditure is $30,000. The expected inflation rate of current expenditures until retirement and the expected return on investment are 3% and 8%, respectively.  Moonn assumes her consumption expenditures will increase with the rate of inflation, 3%, until she retires. Upon retiring she will have end-of-year expenditures equal to her consumption expenditure at age 68.

Caleb calculated the minimum amount that Moonn must accumulate by age 68 in order to fund her retirement is closest to:

$1,552,000

$1,176,000

$928,000

$7,346,640

$15,974,640

$10,794,620

Explanation / Answer

7)

Future value = present value * (1+r)^n

r = interest rate per period

n = number of periods

= 5 million * (1+8%)^10

= 10,794,620

choose c)

8)

13000 = 10000 * (1+r)

=>

project return r = 30%

hence A) yes since project return is greater than interest rate

9)

current value of perpetuity that starting from 25th year

= 1000/10% * (1/(1+10%)^25)

= 922.96

yes , since that perpetuity is worth less than 1000 totday

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