Question

John Smith is 30 years old and graduated from CSUSM some years back, with a Business degree and an emphasis in Marketing. John is currently employed as a Marketing Manager at a well-known corporation. He has progressed well in his career, with the ultimate goal of becoming the company’s CEO. John’s current salary of $78,000 has increased at an average rate of 5% per year, with routine merit raises, and he expects it keep increasing. John’s firm, ABC Corporation, has a defined contribution plan (401k) plan in place.  Employees are allowed to contribute up to 15% of their gross annual salary. Unfortunately, John has not yet taken Professor Money Man’s advice to “Save, Start Young, and Pay Yourself First.” Instead, John has enjoyed his post-college, nice-salary life by leasing a new car, renting an apartment and going out to Player’s every weekend. Now that he has wedding plans on the horizon, John has come to the realization (with help from his fiancée, Jane Doe) that it’s time to start saving – while he’s still relatively young! John expects that the lovebirds’ two largest future expenses will be the cost of a wedding (short-term), then later the down payment on a house (intermediate-term). The couple plans to spend $10,000 of their own money on the wedding in twelve months. They also hope to purchase a $400,000 house within 5 years. Jane’s parents have promised to match their 10% down payment, but only if they manage to save it within 5 years. Finally, John would like to retire at age 60, since his own father died at age 59 and did not get to enjoy the fruits of his labor in retirement. Both future spouses agree that John will automate his savings by setting up monthly contributions to his wedding, house and 401k accounts.

3) John’s fiancée, Jane Doe, is adamant about getting married in the next year.  She is insisting that John makes saving towards the $10,000 needed their top priority.  John recalls that Professor Money Man says, “don’t invest in long-term investments with short-term money.”  Therefore, he plans to keep the wedding account in the bank and buy short-term (under 1-year maturity) CD’s.  Assuming John stays continuously invested in CD’s yielding 2% annual yield for the duration of each monthly deposit from the beginning month (Month 0), how much will he have to contribute to the wedding fund every month for the next 12 months?

Your calculations will require the use of a financial calculator.  Please provide your detailed calculations, step-by-step, including calculator functions, in order to receive maximum credit – or partial credit if the final answer is incorrect.

Answer 1

Since he wants to deposit fixed amount every month in a CD yielding 2% annual yield he wants to have $10000 at the end of 12 month and the deposit is being made at Month O, that means at the begining of the period So, set your financial calculator at the begin mode Future value (FV) = 10000 1/Y = 2%/12 Number of deposits = 12 Compute PMT, that is monthly deposit 824.35