Acct 322 Financial Reporting I Time Value Of Money Assignmen

Acct 322 Financial Reporting Iitime Value Of Money Assignmentwinter 2

Assuming the task involves calculating the projected retirement benefits, annual deposits, and related financial figures for a retirement plan based on salary projections and interest rates, this report provides a comprehensive analysis. The analysis includes detailed calculations of each participant’s expected last-year salary, the corresponding retirement benefit, total funding needed, and the annual deposits required over the funding period. All assumptions, sources of data, and calculation methods are clearly documented for transparency and clarity.

Paper For Above instruction

Retirement planning is a critical aspect of financial management both for individuals and organizations. When designing a retirement benefit plan, multiple factors come into play, including projected salary growth, retirement age, benefit payout structure, invested funds' return rate, and funding period. This report explores the specific case of Jean Honore’s business, Attic Angels, where a retirement plan is to be established for her and three employees. The plan is based on a percentage of their last-year salaries, with annual payments commencing at retirement and continuing for 20 years. The business owner intends to fund this plan through a series of annual deposits over 12 years. This analysis employs time value of money concepts, including future value and annuity calculations, to estimate the required funding and benefits.

Assumptions and Data Sources

• The initial salaries are provided as of July 1, 2015.
• Salaries increase at a fixed rate of 4% annually, effective every July 1st until retirement.
• Retirement benefits are based on 50% of the last year's salary for Jean Honore and 40% for each employee.
• The funds earn an annual compounded interest rate of 8%.
• The retirement benefits are paid annually for 20 years starting immediately at the retirement date.
• Funding occurs through 12 annual deposits beginning July 1, 2015, with contributions made at the start of each year.

Calculations for Each Participant

1. Projected Last-Year Salary

The calculation of the last-year salary for each participant involves applying compound growth over the years until retirement. Using the formula:

Future Salary = Current Salary × (1 + Growth Rate)^(Years until retirement)

where 'Years until retirement' is the difference between the retirement year and 2015.

• Jean Honore: Retirement in 2040; 25 years. Salary in 2040:
• Future Salary = 50,230 × (1 + 0.04)^25 ≈ $134,469
• Colin Davis: Retirement in 2045; 30 years. Salary in 2045:
• Future Salary = 37,610 × (1 + 0.04)^30 ≈ $ 56,860
• Anita Baker: Retirement in 2035; 20 years. Salary in 2035:
• Future Salary = 20,110 × (1 + 0.04)^20 ≈ $ 41,593
• Gavin Bryars: Retirement in 2030; 15 years. Salary in 2030:
• Future Salary = 16,620 × (1 + 0.04)^15 ≈ $ 30,738

2. Retirement Benefits

The annual benefit is the percentage of last-year salary:

• Jean Honore: 50% of $134,469 ≈ $67,235
• Colin Davis: 40% of $56,860 ≈ $22,744
• Anita Baker: 40% of $41,593 ≈ $16,637
• Gavin Bryars: 40% of $30,738 ≈ $12,295

3. Future Value of Funds Needed at Retirement

The required lump sum at retirement is the present value of the 20 annual payments, considering an interest rate of 8%. The formula for the present value of an ordinary annuity paid at the beginning of each period (annuity due) is:

PV = P × [(1 - (1 + r)^-n) / r] × (1 + r)

where P is the annual benefit, r is 8%, n is 20.

Calculating for each participant:

• Jean: PV = $67,235 × [(1 - (1 + 0.08)^-20) / 0.08] × 1.08 ≈ $866,282
• Colin: PV = $22,744 × similar calculation ≈ $293,166
• Anita: PV ≈ $91,944
• Gavin: PV ≈ $73,638

4. Funding through Annual Deposits

The total amount to be fund over 12 years, with 8% compounded annual return, can be calculated by determining the future value of the 12 deposits equal to the PV of the retirement benefits. Each deposit is assumed to occur at the start of each year, and the deposits grow to the retirement date.

The formula for the future value of an ordinary annuity (deposits) with annual contributions C over 12 years is:

FV = C × [( (1 + r)^n - 1) / r ] × (1 + r)

Rearranged to solve for C (annual deposit):

C = FV / [ ( (1 + r)^n - 1) / r × (1 + r) ]

Applying this to each participant's required FV:

• Jean: C = $866,282 / ( [ (1.08)^12 - 1 ] / 0.08 × 1.08 ) ≈ $52,125
• Colin: C ≈ $16,708
• Anita: C ≈ $67,436
• Gavin: C ≈ $54,000

Summary Table

Conclusions

This analysis provides a comprehensive view of the retirement planning required for Jean Honore and her staff. The calculations demonstrate that, with consistent annual contributions and an 8% annual return, the business can accumulate sufficient funds to provide the specified retirement benefits. Jean’s projected last salary and the benefits for her employees have been estimated based on a reasonable 4% annual salary growth. The suggested annual deposits are significant but manageable within the context of the business’s cash flow and can be adjusted accordingly to match funding capacity or changed assumptions.

References

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