Tutorial 2: Financial Statements and Time Value of Money

Active income – work for the income – Job, Salary

Passive income – no need work for it – asset generate income, EXP: Rental received
JUNE NG
STATEMENT OF NET WORTH AS AT 31 DECEMBER 2021
LIABILITIES /
ASSETS RM RM
NET WORTH

Cash/ Cash Equivalents 50,000 Current Liabilities 10,000

Savings account 40,000 Credit card 10,000
Insurance cash value 10,000
Long-Term Liabilities 615,000
Investment Assets 350,000 Mortgage 600,000
Apartment 350,000 Car loan 15,000

Personal-Use Assets 480,000 Net Worth ?255,000

House 400,000
Car 80,000

TOTAL ASSETS 880,000 TOTAL LIABILITIES / N.W. 880,000

JUNE NG
CASH FLOW STATEMENT FOR THE YEAR ENDING 31 DECEMBER
2021
RM RM
INFLOWS
Net Salary (net of Employee’s EPF Contribution & Tax) 132,000
Net Rental Income 12,000
TOTAL INFLOWS 144,000

FIXED OUTFLOWS
Life Insurance Premiums 6,000
Mortgage Payments 36,000
Car Loans Repayments 18,000
Maid’s Salary 12,000
Sub Total 72,000

VARIABLE OUTFLOWS
Food/ Groceries 25,000
Utilities 10,000
Children Education 12,000
Family Vacation 10,000
Others i.e., gifts, celebrations, etc 8,000
Sub Total 65,000
TOTAL OUTFLOWS 137,000

NET CASH FLOW 7,000

1. Based on the financial statements, compute June’s:

a. Basic Liquidity Ratio (3 – 6 months monthly expenses cushion)

Cash/Cash Equivalents
Basic Liquidity Ratio=
Monthly Expenses

40,000+10,000
Basic Liquidity Ratio=
137,000/12

50,000
Basic Liquidity Ratio=
11,416.67

Basic Liquidity Ratio=4.38 months

Healthy, because expert recommend 3-6 months as the benchmark.

b. Debt-to-Asset Ratio (≤ 50% good)

Total Debts
Debt−¿− Asset Ratio=
Total Assets
 10,000+600,000+15,000
Debt−¿− Asset Ratio= x 100 %
880,000

625,000
Debt−¿− Asset Ratio= x 100 %
880,000

Debt−¿− Asset Ratio=0.7102 x 100 %=71.02 %

Not healthy, because expert recommend ratio of 50% or below as the benchmark.

c. Debt Service Ratio (≤ 35% good)

Total Annual Loan Repayments
Debt Service Ratio=
Annual Take Home Pay
36,000+18,000
Debt Service Ratio= x 100 %
144,000
54,000
Debt Service Ratio= x 100 %
144,000
Debt Service Ratio=0.3750 x 100 %=37.5 %

Not healthy, because expert recommend a ratio of 35% or lower as the

benchmark.

d. Non-Mortgage Debt Service Ratio (≤ 15% good)

Total Non−Mortgage Loan Repayments
Non−Mortgage Debt Service Ratio=
Annual Take Home Pay
18,000
Non−Mortgage Debt Service Ratio= x 100 %
144,000
18,000
Non−Mortgage Debt Service Ratio= x 100 %
144,000
Non−Mortgage Debt Service Ratio=0.1250 x 100 %=12.5 %

Healthy, because expert recommend a ratio of 15% or lower as the benchmark.

e. Liquid-Assets-to-Net Worth Ratio (≥ 15% adequate)

Liquid Assets
Liquid− Assets−¿−Net Worth Ratio=
Net Worth
 40,000+10,000
Liquid− Assets−¿−Net Worth Ratio= x 100 %
255,000

50,000
Liquid− Assets−¿−Net Worth Ratio= x 100 %
255,000

Liquid− Assets−¿−Net Worth Ratio=0.1961 ≈ 19.61%

Healthy, because expert recommend a minimum ratio of 15% as the benchmark.

f. Savings Ratio (≥ 10%, excluding EPF)

Savings(refer ¿ Net Cash Flow)
Savings Ratio=
Gross Income
7,000
Savings Ratio= x 100 %
144,000
Savings Ratio=0.0486≈ 4.86 %

Not healthy, because expert recommend a minimum ratio of 10% as the

benchmark.
g. Net Investment Assets to Net Worth Ratio (≥ 50%, when older, % higher)
Net Investment Assets
Net Investment Assets ¿ Net Worth Ratio=
Net Worth
350,000
Net Investment Assets ¿ Net Worth Ratio= x 100 %
255,000
Net Investment Assets ¿ Net Worth Ratio=1.3725 x 100 %=137.25 %

Healthy, because expert recommend a ratio of 50% and above as the benchmark.

***PV must put NEGATIVE***

***Retirement question – BEGINNING***
***Housing loan question – END***

2. Lucas wants to know how much to invest now, if the annual interest rate is 7%
compounded on a monthly basis. He wants to have RM50,000 in 10 years’ time.
 P
=12
Yr
i=7 %
FV =RM 50,000
n=10 x 12=120׿
PV =?

PV =RM 24,879.81

3. How long does it take for RM5,000 to grow into RM6,724.44 at 10% compounded
quarterly?
P
=4
Yr
PV =−RM 5,000
FV =RM 6,724.44
i=10 %
?
n=
4

12
n= =3 years
4

4. What interest rate is implied if you borrow RM12,500 and repay RM21,362.24 in
three years with monthly compounding?
P
=12
Yr
PV =−RM 12,500
FV =RM 21,362.24
n=3 x 12=36׿
i=?

i=17.99 %

5. Kiki has just been paid RM400,000 by an insurer and intends to place the money in
a bond fund with an expected return of 6% a year. How long will it take for the
sum to be RM 1 million?
 P
=1
Yr
PV =−RM 400,000
i=6 %
FV =RM 1,000,000
n=?

n=15.73 years

6. Patrick plans to place RM75,000 in a fixed deposit account with an interest rate of
4 % a year. The FD pays interest every quarter and the amount is re-deposited to
earn interest. He wants to know how much money is available after 10 years.
P
=4
Yr
PV =−RM 75,000
i=4 %
n=10 x 4=40׿
FV =?

FV =111,664.78

7. David requires RM80,000 in 5 years’ time. He has placed his funds in a vehicle that
generates an annual compounded rate of 7.75%. How much must he invest in a
lump sum now?
P
=1
Yr
FV =RM 80,000
n=5 years
i=7.75 %
PV =?

PV =RM 55,081.23

8. There are 2 investment plans, X and Y. Plan X involves setting aside RM500 at the
beginning of every quarter for 10 years. Plan Y requires an amount of RM 250 at
 the beginning of each quarter for 20 years. If the rate of return is 9% a year
compounded quarterly, which plan provides a higher future value?
Plan X
Beginningmode
P
=4
Yr
PMT =RM 500
n=10 x 4=40׿
i=9 %
FV =?

FV =RM 32,610.68

Plan Y
Beginningmode
P
=4
Yr
PMT =RM 250
n=20 x 4=80׿
i=9 %
FV =?

FV =RM 56,011.93

Plan Y provides a higher future value.

9. Jason plans to retire with an annual income of RM125,000 each year for a period of
25 years. Compute the total fund required if the retirement fund (Retirement fund –
Beginning Mode) is earning 5% at the distribution phase and the retirement fund
starts immediately when Jason reached his retirement age.
Beginning Mode
 P
=1
Yr
i=5 %
n=25׿
PMT =RM 125,000
PV =?

PV =RM 1,849,830.22

10. Assume that you plan to buy a condominium 5 years from now, and you estimate
that you can save RM2,500 per year. You plan to deposit the money into the bank
that pays 4% interest, and you will make the first deposit at the beginning of each
year. How much will you have after 5 years?
Beginning Mode
P
=1
Yr
n=5
i=4 %
PMT =2,500
FV =?

FV =RM 14,082.44

11. Annual deposits of RM24,000 have been made at the beginning of each year into
the annuity policy fund for the last 20 years. During this period, the interest earned
on the deposits was as follows:
i) 10% for the first five years
ii) 8% for the next five years
iii) 9% for the last ten years

i. Calculate the accumulated amount at the end of 20 years.

i) Beginning Mode
P
=1
Yr
PMT =24,000
 n=5
i=10 %

FV 5=161,174.64

ii) PV 5=161,174.64
PMT =24,000
n=5
i=8 %

FV 10=388,880.72

iii) PV 10=388,880.72
PMT =24,000
n=10
i=9 %

FV 20=1,318,069.13

ii. Calculate the total interest earned for the 20 years.

Total interest earned=1,318,069.13−(24,000 x 20)=RM 838,069.13