Question

1. Billy and Jonas have come to you because your reputation as an expert financial adviser is clearly growing. They are in their early 30s and both have high ncomes (Billy $85,000 pa and Jonas $110,000 pa). They have a mortgage of $100,000 on their home which they have been able to pay down to this amount from their incomes. Their mortgage rate is 4% fixed for 30 years They are in the fortunate position of inheriting $300,000 and have come to you for advice as to what to do with the money. They tell you that they really don't need access to the money or income from it. They wish to preserve and grow it over the next 25 years, but they don't know anything about investing Using the information from this week (and week 5), advise them! What should they do with the money and why? Be brief in explanation, giving not only your recommendations but why you have made them, and show in a spreadsheet the potential effects of your recommendations Hint 1: You will need to do some simple exponential modeling-using either the compound interest formula or doubling time Hint 2: You will also need to make some sensible assumptions about rates of investment return Hint 3: We are not looking for the world's best financial plan here just an indication that you understand the content from this week. And can put it together with some coherence.

Answer 1

You can advise them to invest this amount into some equity funds or mutual funds which give relatively higher return on the investments. Since, they don't need this money over next 25 years, an ideal selection for investment will be long term equity fund.

We will do exponential modeling using compounding interest formula. Recall the compounding interest formula:

FV = PV x (1 + i)ⁿ where FV = Maturity amount, PV = Present amount invested, i = investment rate earned by the investment and n = number of periods you stay invested.

We will evaluate the maturity amount for a range of investment rate say i = 10% to 15% (this is a reasonable assumption for equity funds)

Please see the table below. I have done it in excel. The formula used in excel has been produced in the adjacent cell colored in yellow, so that you can reproduce this table at your end.

Conclusions:

R T U 23 PV 24 n 25 300.000 25 13.00% 10.00% 11.00% 12.00% 14.00% 15.00% 26 FV 3,250,412 4,075,639 5,100,019 6,369,163 7,938,575 9,875,686 =$Q$23* (1+R25)^$Q$24 =$Q$23*(1+S25)^$Q$24 $Q$23*(1+T25)^$Q$24 -$Q$23*(1+U25)^$Q$24 -$Q$23*(1+V25)^$Q$24 =$Q$23*(1+Q25)^$Q$24 27 Formula Used 28 Investment Multiple 10.83 13.59 17.00 21,23 26.46 32.92 =V26/ SQ$23 - Q26/ $Q$23 R26/$Q$23 -S26/ $Q$23 =T26 / $Q$ 23 =U26/$Q$23 29 Formula Used

1. The investment can grow any where from current level of $ 0.30 mn to anywhere between $ 3.25 mn to $ 9.88 mn

2. The investment can potentially grow around 10.83x to 32.92x