Financial Management - Solved Questions and Answers

FINANCIAL MANAGEMENT
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Question 2
a) i) In this case, the future value of an annuity needs to be found. The relevant formula is
indicated below (Arnold, 2015).
In the given case, P = $ 3,700
R = 4.8% p.a. or (4.8/12) = 0.4% per month
N = 20 years and 11 months = 20*12 + 11= 251 months
Hence, FV of annuity = 3700*(1.004251-1)/0.004 = $1,594,437.84
The target to be achieved at age 63 was $ 1,600,000 but Ruth has not managed to achieve the
target.
Shortfall in target at age 63 = $1,600,000 - $1,594,437.84 = $ 5,562.16
(ii) The value of the monthly pension needs to be determined. It is assumed that the pension
amount would be paid at the end of month. For this, the present value of annuity formula
given below ought to be used (Damodaran, 2015).
In the given case, PV of annuity = $ 1,594,437.84
R = 4.8% p.a. or (4.8/12) = 0.4% per month