Business Finance - Analysis of Investment in First Financial Product

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Author’s Note:

1BUSINESS FINANCE
Table of Contents
First Exercise:.............................................................................................................................2
Scenario A:.............................................................................................................................2
Analysis of investment in first financial product...............................................................2
Analysis of the investment in the financial product offered..............................................2
Decision making.................................................................................................................3
Scenario B:.............................................................................................................................3
Scenario c:..............................................................................................................................4
Second Exercise:........................................................................................................................5
Third Exercise:...........................................................................................................................8
Bibliography:............................................................................................................................10

2BUSINESS FINANCE
First Exercise:
Scenario A:
Analysis of investment in first financial product
Amount saved till now €450,000
Years to maturity 10 years
Guaranteed annual dividend 7.5%
Future value of the first financial product =450,000 × ( 1+7.5 % ) 10=€ 927,464
Analysis of the investment in the financial product offered
Investment in financial product offered by €927,464
Number of years till the age of 100 years = 100−65=35 year s
Annual return 3%
Future value at the age of 100 years 0
Using the present value formula of annuity:
€ 927,464=P×
1−(1+ 3 %
12 )−35 ×12
3 %
12
P=
€ 927,464 × 3 %
12
1− (1+ 3 %
12 )−35× 12
P= € 2319
0.6496 =€ 3,569

3BUSINESS FINANCE
Decision making
The investor is of 55 years age and having a savings of €450,000. The investor wants
to invest the savings in a retirement plan at an annual dividend of 7.5% and plans to retire at
an age of 65 years. It can be observed from the above calculation that, the first financial
product will accumulate a total of €927,464 at the age of retirement. Now if the investor does
not invest in any other investment plan then the accumulated amount will have to be used till
the age of 100 years for meeting the cost of living. In such a case the maximum monthly
spending has been calculated as follows
Amount in hand at the age of retirement €927,464
Number of months till the age of 100 years 420 months
Maximum monthly spending = € 927,464
35∗12 =€ 2,208
Now, if the investor goes for the offered financial product and invest the amount at an
annual return of 3%, then monthly withdrawal would be €3,569. Hence, the investor can have
an additional amount of €1,361. Therefore, it can be recommended to accept the offer and
invest in the second financial product, which will be ultimately beneficial for the investor.
Scenario B:
Investment €100,000
Monthly rent income €1,500
Monthly interest rate 2.5%
Number of years 5 year
Present value of cash flows = € 1,500× 1− ( 1+ 2.5 % )−5× 12
2.5 % =€ 46,363