Question

“Boy, this is all so confusing,” said Ryan as he stared at thepapers on his desk. If only I had taken the advice of my financeinstructor, I would not be in such a predicament today.” RyanDaniels, aged 27, graduated five years ago with a degree in foodmarketing and is currently employed as a middle-level manager for afairly successful grocery chain. His current annual salary of$70,000 has increased at an average rate of 5 percent per year andis projected to increase at least at that rate for the foreseeablefuture. The firm has had a voluntary retirement savings program inplace, whereby employees are allowed to contribute up to 11% oftheir gross annual salary (up to a maximum of $12,000 per year) andthe company matches every dollar that the employee contributes.Unfortunately, like many other young people who start out in theirfirst “real” job, Ryan has not yet taken advantage of theretirement savings program. He opted instead to buy a fancy car,rent an expensive apartment, and consume most of his income.However, with wedding plans on the horizon, Ryan has finally cometo the realization that he had better start putting away some moneyfor the future. His fiancée, Amber, of course, had a lot to do withgiving him this reality check. Amber reminded Ryan that besidesretirement, there were various other large expenses that would beforthcoming and that it would be wise for him to design acomprehensive savings plan, keeping in mind the various costestimates and timelines involved. Ryan figures that the two largestexpenses down the road would be those related to the wedding anddown payment on a house. He estimates that the wedding, which willtake place in twelve months, should cost about $15,000 in today’sdollars. Furthermore, he plans to move into a $250,000 house (intoday’s terms) after 5 years, and would need 20% for a downpayment. Ryan is aware that his cost estimates are in current termsand would need to be adjusted for inflation. Moreover, he knowsthat an automatic payroll deduction is probably the best way to gosince he is not a very disciplined investor. Ryan is really notsure how much money he should put away each month, given theinflation effects, the differences in timelines and the salaryincreases that would be forthcoming. All this number crunchingseems overwhelming and the objectives seem insurmountable. If onlyhe had started planning and saving five years ago, his financialsituation would have been so much better. But, as the saying goes,“It’s better late than NEVER!”

Question 4: . How much would Ryan have to save each month,starting from the end of the next month, in order to accumulateenough money for his wedding expenses, assuming that his investmentfund is expected to yield a rate of return of 7% per year and theinflation is 4% annually?

Question 5. If Ryan starts saving immediately for the 20% downpayment on his house, how much additional money will he have tosave each month? Assume an investment rate of return of 7% peryear.