Author Question: Amy Plisko is 23 years old and plans to retire in 32 years when she is 55 years old. Amy just ... (Read 444 times)

jho37 · **on:** Jul 10, 2018

Amy Plisko is 23 years old and plans to retire in 32 years when she is 55 years old. Amy just graduated from a university in the West.

Upon graduation, she took a job with a starting annual salary of 50,000. Amy asks you to answer the following two questions:
1. If her salary increases at a rate roughly equal to the U.S. long-run average annual rate of inflation over the past 80 years (about 3 per year), how large will her annual salary be in her last year before retirement? (Use 32 years.)
2. If her salary increases at a rate roughly equal to the U.S. long-run average annual rate of return on common stocks over the past 80 years (about 10.5 per year), how large will her annual salary be in her last year before retirement? (Use 32 years.)

After hearing your answers, Amy says, WOW That's quite a difference. She decides that she would like an income of 500,000 per year each year in retirement, provided in equal annual end-of-the-year cash flows. These cash flows need to last for 40 years, and her investments would earn an annual rate of return of 7 during her retirement.

Amy's final question to you is how much money must she save in equal annual end-of-the-year cash flows for the next 32 years to provide for her desired retirement, if her investments earn roughly the same rate of return as those earned by U.S. small stocks over the last 80 years (geometric average is about 12 per year).

Use a calculator to determine the answers to the different parts of the problem.
What will be an ideal response?

Question 2

The term lumpy asset means

A) assets that must be purchased in discrete quantities.
B) assets that can be purchased in incremental units.
C) the same thing as assets that exhibit scale economies.
D) assets that have economies of scale but not economies of scope.

bhavsar · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer:
1. Calculator Solution:
MODE = END
INPUT 32 3.0 -50,000 0 ?
KEY N I/Y PV PMT FV
CPT 128,754.14

2. Calculator Solution:
MODE = END
INPUT 32 10.5 -50,000 0 ?
KEY N I/Y PV PMT FV
CPT 1,220,570.59

3. Calculator solution for the PV of her retirement salary at T = 32:
MODE = END
INPUT 40 7.0 ? 500,000 0
KEY N I/Y PV PMT FV
CPT 6,665,854.42

4. Calculator solution for the PMTs needed to get to the FV of 6,665,854.42 at T = 32:
MODE = END
INPUT 32 12.0 0 ? 6,665,854.42
KEY N I/Y PV PMT FV
CPT 21,866.18

Answer to Question 2

A