Question

After completing your education, you joined as an investment advisor in Sahyog Capital Ltd, one of the renowned limited liability partnership firms. Your job profile includes providing investment advice to individuals and corporates. You have been approached by Mr. Hasmukh bhai, he wants some help on investment related matters. Mr. Hasmukh bhai is currently 45 years old. He plans to work for 15 more years and retire at the age of 60. His present income is INR 4,50,000 per year. He expects his income to increase at the rate of 12 % p.a. until his retirement. Once he retires at the age of 60 years, he would like to withdraw INR 5,50,000 p.a. from his investment for the following 15 years (as he expects to live up to the age of 75 years). He also wants to bequeath INR 10,00,000 to his only son at the end of his life. 1) How much money would he need 15 years from now?

2) How much should he save each year for the next 15 years to be able to meet his investment objectives spelt out above? Mr. Hasmukh bhai wants to donate INR 2,00,000 each year in the last three years of his life to the orphanage home. Each donation would be made at the end of the year.

3) How much money does he needs when he reaches the age of 60 years to meet this specific donation need?

Mr. Hasmukh bhai attended a seminar on human capital where the speaker talked about a person’s human capital as the present value of his lifetime earnings. Mr. Hasmukh bhai is curious to find out the present value of his lifetime salary. For the sake of simplicity assume his present salary is INR 4,50,000 will be paid exactly one year from now (i.e. when he is 46 years old), and his salary will be paid in annual instalments. Remember that Mr Hasmukh bhai expects his salary to increase at the rate of 12% p.a. until his retirement. 4) What is the present value of his lifetime salary?

In this entire case assume inflow/outflow of income is happening at the end of the year. The discount rate is 10%. Also, ignore any tax factor.

PLEASE DO ALL 4 SHORT QUESTIONS IN EXCEL

Answer 1

1. Amount needed 15 years from now= INR 4,422,735.78 as follows:

2.   Amount to be saved every year, during the 15 years till retirement= INR 139,200.20 as follows:

3. Amount needed at the age of 60, for charity @INR 2,00,000 at the age of 73, 74 and 75

= INR 158,477.54 as follows:

4. Present Value of life time salary is the PV of growing annuity, calculated at INR 6,982,382.80

as follows: