Morris Glass Company has decided to invest funds for the next 5 years so that de
ID: 2770142 • Letter: M
Question
Morris Glass Company has decided to invest funds for the next 5 years so that development of "smart" glass is well funded in the future. This type of new-technology glass uses electrochrome coating to allow rapid adjustment to sun and dark in building glass, as well as assisting with internal heating and cooling cost reduction. The fi nancial plan is to invest first, allow appreciation to occur, and then use the available funds in the future. All cash flow estimates are in $1000 units, and the interest rate expectation is 9% per year. Years 1 through 5: Invest $7000 in year 1, decreasing by $ 1000 per year through year 5 Years 6 through 10: No new investment and no withdrawals. Years 11 through 15: Withdraw $20,000 in year 11, decreasing 20% per year through year 15. Determine if the anticipated withdrawals will be covered by the investment and appreciation plans. If the withdrawal series is over- or underfunded, what is the exact amount available in year 11, provided all other estimates remain the same?Explanation / Answer
Given that Withdraw $20,000 in year 11, decreasing 20% per year through year 15. But the 20% is of the year 11th or 20% of teh previous withdrawal has not been mentioned hence I have considered it on the both ways.
1) Plan 1: Where I assumed reduction of 20% in withrawal of the previous year.
2) Plan 2: Where I assumed reduction of 20% in withrawal of the 11th year. i.e.reduction of $4,000 each year.
Plan 1: Reduction of 20% in withrawal of the previous year.
PLAN- A
Yr.
Int. Factor
CF($)
Balance0
Balance0xi
Balance1($)
a
b
c
d
e=(d x b)
f=(e x b)
1
1.09
7000
7000.00
2
1.09
6000
7000.00
7630.00
13630.00
3
1.09
5000
13630.00
14856.70
19856.70
4
1.09
4000
19856.70
21643.80
25643.80
5
1.09
3000
25643.80
27951.75
30951.75
6
1.09
0.00
30951.75
33737.40
33737.40
7
1.09
33737.40
36773.77
36773.77
8
1.09
36773.77
40083.41
40083.41
9
1.09
40083.41
43690.91
43690.91
10
1.09
43690.91
47623.10
47623.10
11
1.09
-20000
47623.10
51909.18
31909.18
12
1.09
-16000
31909.18
34781.00
18781.00
13
1.09
-12800
18781.00
20471.29
7671.29
14
1.09
-10240
7671.29
8361.71
-1878.29
15
1.09
-8192
-1878.29
-2047.34
-10239.34
Anticipated withdrawals will NOT be covered by the investment and appreciation plans, as at year 14 & 15 do not have sufficient cash balance for scheduled withdrawal.
2) Plan 2: reduction of 20% in withrawal of the 11th year. i.e.reduction of $4,000.
PLAN-B
.
Int. Factor
CF($)
Balance0
Balance0xi
Balance1($)
a
b
c
d
e=(d x b)
f=(e x b)
1
1.09
7000
7000.00
2
1.09
6000
7000.00
7630.00
13630.00
3
1.09
5000
13630.00
14856.70
19856.70
4
1.09
4000
19856.70
21643.80
25643.80
5
1.09
3000
25643.80
27951.75
30951.75
6
1.09
0.00
30951.75
33737.40
33737.40
7
1.09
33737.40
36773.77
36773.77
8
1.09
36773.77
40083.41
40083.41
9
1.09
40083.41
43690.91
43690.91
10
1.09
43690.91
47623.10
47623.10
11
1.09
-20000
47623.10
51909.18
31909.18
12
1.09
-16000
31909.18
34781.00
18781.00
13
1.09
-12000
18781.00
20471.29
8471.29
14
1.09
-8000
8471.29
9233.71
1233.71
15
1.09
-4000
1233.71
1344.74
-2655.26
Anticipated withdrawals will NOT be covered by the investment and appreciation plans, as at the year 15, do not have sufficient cash balance for scheduled withdrawal.
From both the plans, balance at start of year 11 was $47,623.10.
It was considered that all yearly investments & withdrawals are made at end of the respective year.
Notes:
PLAN- A
Yr.
Int. Factor
CF($)
Balance0
Balance0xi
Balance1($)
a
b
c
d
e=(d x b)
f=(e x b)
1
1.09
7000
7000.00
2
1.09
6000
7000.00
7630.00
13630.00
3
1.09
5000
13630.00
14856.70
19856.70
4
1.09
4000
19856.70
21643.80
25643.80
5
1.09
3000
25643.80
27951.75
30951.75
6
1.09
0.00
30951.75
33737.40
33737.40
7
1.09
33737.40
36773.77
36773.77
8
1.09
36773.77
40083.41
40083.41
9
1.09
40083.41
43690.91
43690.91
10
1.09
43690.91
47623.10
47623.10
11
1.09
-20000
47623.10
51909.18
31909.18
12
1.09
-16000
31909.18
34781.00
18781.00
13
1.09
-12800
18781.00
20471.29
7671.29
14
1.09
-10240
7671.29
8361.71
-1878.29
15
1.09
-8192
-1878.29
-2047.34
-10239.34
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