Case Analysis

Sukhbir Kaur
Data Given

Ramesh present Age 45

Retirement Age 60
Live till Age 75
Present Bank Balance 600000
Present Salary 400000
Increase in salary 12.00%
Investment Plan

Investment = Bank Balance + Yearly savings

Invest equally in stock and bonds

Return of stocks 13%

Return of bonds 7%
Outflows

After retirement annual

requirement per year 500000

Amount for children at the end of

his life 1000000

Discount Rate 8%
To Find?

Total money required at 60 years of age

Savings every year for next 15 years

When Present Value is used?
 Future cash flows are known
 Cash flow is in a single year
 PVIF
 Cash flow is in every year
 PVIFA (if all cash flows are equal)
 OR PVIF (if all cash flows are unequal)
 Discounting factor is known
After Retirement
Age Time Cash flows
61 1 500000
62 2 500000
63 3 500000
64 4 500000
65 5 500000
66 6 500000
67 7 500000
68 8 500000
69 9 500000
70 10 500000
71 11 500000
72 12 500000
73 13 500000
74 14 500000
75 15 1500000
To Find?

What is the total money required at 60 years

of age?????
Calculate Present Value
 Two components
 Rs.5,00,000 every year
 Rs.10,00,000 at the age of 75 years
 Present Value =
5,00,000 * PVIFA (8%, 15)
+
10,00,000 * PVIF(8%,15)
 Calculate Present Value

Money required at 60 years of age

10,00,000* PVIF (8%, 15) or 0.315= 315000

5,00,000* PVIFA(8%,15) or 8.559= 4279500

Total 4594500
When Future Value is used?
 Present cash flows are known
 Cash flow is in a single year
 FVIF
 Cash flow is in every year
 FVIFA (if all cash flows are equal)
 OR FVIF (if all cash flows are unequal)
 Rate of Return is known
Before Retirement

 Right now his age is 45

 He will retire at 60 years of age
 His present annual salary is Rs.4,00,000
 His salary is going to grow by 12 %
 His bank balance is Rs.6,00,000
To Find?

What should be the savings every year for

next 15 years?????
Calculate Future Value
 Two components
 Bank balance of Rs.6,00,000
 Savings each year for next 15 years (X)
 Invest equally in stock and bonds
 Bank balance of Rs.3,00,000
 Savings each year for next 15 years (X/2)
 Rate of return is different
 Stocks is 13%
 Bonds is 7%
Calculate Future Value

Total Savings at 60 years of age =

Return of yearly savings (X/2) by investing in

Bonds+
Return of yearly savings (X/2) by investing in
Stocks+
Return of Rs.300,000 by investing in Bonds+
Return of Rs.300,000 by investing in Stocks
Calculate Future Value
Total Savings at 60 years of age =

(X/2) * FVIAF(7%,15)
+
(X/2) * FVIAF(13%,15)
+
300000 * FVIF(7%,15)
+
300000 * FVIF(13%,15)
Calculate Future Value
Total Amount required by
Ramesh at 60 years of age = 4594500

Total Savings at 60 years of age =

(X/2) * 25.129 +
(X/2) * 40.417+
300000 * 2.759 +
300000 * 6.254
Calculate Future Value

Savings every year for next 15 years

equal to (X) 57687.731
Part II

 Note: Each donation at the BEGINNING of

year
 Rs.2,00,000 at the age of 73, 74, 75 years
 To Find: What is the total money required at
60 years of age for donations
specifically?????
Cash Flows for Donations
Age Time Cashflows
60 0
61 1 0
62 2 0
63 3 0
64 4 0
65 5 0
66 6 0
67 7 0
68 8 0
69 9 0
70 10 0
71 11 0
72 12 0
73 13 200000
74 14 200000
75 15 200000
Calculate Present Value
 Present Value at the age of 60 years =

2,00,000 * PVIF(8%,14)
+
2,00,000 * PVIF(8%,13)
+
2,00,000 * PVIF(8%,12)
Calculate Present Value
 Present Value at the age of 60 years =
2,00,000 * 0.340
+
2,00,000 * 0.368
+
2,00,000 * 0.397
= Rs.221000
Part III

Ramesh present Age 45

Retirement Age 60
Present Salary 400000
Increase in salary 12.00%
To Find

 What is the Present Value of his life time

salary at the age of 45 years?????
Before Retirement
Age Time Salary
46 1 400000
47 2 448000
48 3 501760
49 4 561971
50 5 629408
51 6 704937
52 7 789529
53 8 884273
54 9 990385
55 10 1109232
56 11 1242339
57 12 1391420
58 13 1558390
59 14 1745397
60 15 1954845
Calculating Future Value
 At 46 years salary= Rs. 4,00,000
 At 47 years salary= Rs. 448000(1+0.12)1
 At 48 years salary= Rs. 501760(1+0.12)2
 At 49 years salary= Rs. 561971(1+0.12)3
 At 50 years salary= Rs. 629408(1+0.12)4
 At 51 years salary= Rs. 704937(1+0.12)5
 Total salary= Rs.14911885.86
Before Retirement
Age Time Salary Present Value
46 1 400000 370,370.37
47 2 448000 384,087.79
48 3 501760 398,313.27
49 4 561971 413,065.61
50 5 629408 428,364.33
51 6 704937 444,229.68
52 7 789529 460,682.63
53 8 884273 477,744.95
54 9 990385 495,439.21
55 10 1109232 513,788.81
56 11 1242339 532,818.02
57 12 1391420 552,552.02
58 13 1558390 573,016.91
59 14 1745397 594,239.76
60 15 1954845 616,248.64
Calculating Present value
 Discount Rate: 8%
 P.V. of 46th year = Rs, 4,00,000/(1+0.08)1
 P.V. of 47th year = Rs, 4,00,000/(1+0.08)2
 P.V. of 48th year = Rs, 4,00,000/(1+0..08)3
 P.V. of 49th year = Rs, 4,00,000/(1+0.08)4
 P.V. of 50th year = Rs, 4,00,000/(1+0.08)5
 P.V. of 51st year = Rs, 4,00,000/(1+0.08)6
Calculating Present value

 Total Present Value of his life time salary=

Rs.7254962