AS an investment advisor, you have been approached by a client called Ramesh, who wants some help in investment related matters.
Ramesh is currently 45 years old and has Rs. 600000 in the bank. He plans to work for 15 more years and retire at the age of 60.
Ramesh’s present salary is Rs. 400,000 per year. He expects his salary to increase at the rate of 12 % per year until his retirement. Ramesh has decided to invest his bank balance and future savings in a portfolio in which stocks and bonds would be equally weighted. For the sake of simplicity, assume that these proportions will be maintained by throughout. He also believes that bonds would provide a return of 7% and stocks a return of 13 %. You concur with his assessment. Once Ramesh retires at the age of 60 he would like to withdraw Rs. 500,000 per year from his investments for the following 15 years as he expects to live upto the age of 75 years. He also wants to bequeath Rs. 1,000,000 to his children at the end of his life. How much money would he need 15 years from now?
How much should Ramesh save each year for the next 15 years to be able to meet his investment objectives spelt out above? Assume that the savings will occur at the end of each year.
Suppose Ramesh wants to donate Rs 200,000 each year in the last three years of his life to a charitable cause. Each donation would be made at the beginning of the year. How much money would he need when he reaches the age of 60 to meet this specific need?
Ramesh recently attended a seminar on human capital where the speaker talked about a person’s human capital as the present value of his lifetime salary. For the sake of simplicity assume that his present salary of Rs. 400,000 will be paid exactly one year from now, and his salary will be paid in annual installments. What is the present value of his life time salary, if the discount rate is 8%? Remember that Ramesh expects his salary to increase at the rate of 12% percent per year until...
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