For this assignment, you will analyze your own financial situation with one addi

Question

For this assignment, you will analyze your own financial situation with one addition, you have inherited $1 million dollars from a long lost relative (tax free)! There is one caveat with the money, you can’t spend it on whatever you want. Use the Personal Balance Sheet and follow the bulleted items below to work through your financial obligations and opportunities that the $1 million brings. • You MUST first take care of current responsibilities (liabilities), things like a mortgage, credit card debt, current or past bills, car loans, etc. Include a detailed discussion on your current obligations to be taken care of first with the $1 million. Consider the total dollar amount for current obligations and begin deducting your finances from the $1 million (on the Balance Sheet). • Next, consider the future, look at how you can make the money work for you. Consider what you would put into things like investments, retirement, property, etc. Be sure to reference the risk and return websites you searched in the Learning Activities, this may help you to decide whether to weigh the risk, or to settle on a less risky investment. • Next, look at any physical assets you may wish to invest. A new home, or possible rental properties, maybe gold or silver, or another type of commodity. Again, weigh the risk and return to make sure the investment is worth your money. • When you get to the end, if you have a balance remaining, you will need to decide what to spend it on within the items you already considered (i.e. if you purchase a house, you may wish to set aside the excess into a money market account, cd, or other interest earning account to help pay for yearly taxes or insurance on the house). So this could be as easy as setting up a savings account or something along those lines. • Reference any and all source materials used to analyze your financial situation (i.e. textbook, websites, financial publications, and other resources available through the library) The case analysis should be at least 2 pages in length, a completed Personal Balance Sheet should accompany the submission.

Explanation / Answer

The analysis of individual financial statement requires a lot of documentation and good record keeping. It requires proper knowledge of the various accounting concepts, postulates and assumptions in the preparation of the financial statement. The balance sheet is a financial statement tool for the analysis to be used in the personal case study. The ability to rank the obligations and the assets would be determine by the balance sheet to evaluate the financial viability of my financial plan as well as efficient personal financial management.

In this case, given the windfall income received from relative worth $1 million, to be spent in paying the liabilities such as mortgages, electricity bills and other liabilities as reflected by the balance sheet. The remaining amount is to be used for investment purposes. The balance sheet attached shows the amount to be paid under the liability section of the balance sheet. The liabilities to be paid include mortgage worth $100000, car loan $70000, telephone and electricity bills $20000, accounts payable $ 10420 and other accrued expenses worth $11450.The total liabilities is $211870, the remaining amount would be used to invest in a more feasible venture.

The evaluation of a given venture to invest depend on other factors such as the capital available, the risk and the return or the benefits as well as the cost to be incurred. The cost and benefits are critically scrutinized and all other factors affecting the project are incorporated (Greene, & Dince 2007). The most critical element that one has to consider is the return and the risk. The amount remaining after paying the liabilities would be ($1million-211870) =$788130.

The available investment alternatives are categorized on the available options I would like to invest in, evaluate each alternatives subjected to the available income. The first investment alternative is expanding the personal bakery business, the second alternative is buy a rental apartment that would be able to yield a monthly rental income of $10000, the total cost inclusive of all other incidental cost and cost of buying the apartment would be $600000. Investing the remaining amount ($188130) in a stock market. The last alternative is depositing the entire amount in the bank in a fixed deposit account earning an interest of 5% per annum.

The above mention alternatives are a given case studies of risk takers, risk neutral and risk averse person. The most feasible alternative or option is buying apartment yielding a monthly rental income of $10000 which will take 5years for the amount invested in to be paid back. The project is feasible since the investor (myself) have diversified the portfolio and the project might yield a return depending on the market trends of the securities (Swart, 2012). The payback period is 5yrs and if incorporated with investing in securities assuming the market follows given trend of 10% increase, the return might yield a pay back of less than 5years.

Investing in the alternative of depositing the entire amount in the bank would not be feasible since it would take a lot of time for the interest to pay back the investment venture. This option would be the most expensive investment proposal. Expanding the bakery business would require a lot of money which would make us resort to other alternatives like borrowing from a bank without a proper certain returns. I addition to that other expenses are going to shoot up since expansion of the business would require employment and paying rent and buying other machines for bakery.

In conclusion, Proper evaluation is needed and thus alternative two is the most feasible as the returns are certain and the expenses are minimal. An in-depth financial analysis would be required otherwise an investment proposal would be deemed to be feasible at the beginning and turn into a risk in the long -run

References

Greene, M. R., & Dince, R. R. (2007). Personal financial management: A financial planning approach. Cincinnati: South-Western Pub. Co.

Swart, N. (2012). Personal financial management. Lansdowne: Juta.

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