CASELET 2

A 43-year old Indian, Dev Merchant, has decided with the help of a financial
planner as to how to set aside money and create a corpus to meet future
goals. He has 17 goals in mind.

He wants to put aside Rs 20lac for the wedding of his daughter, which will
take place 6 years from today. At the time of the marriage his contribution is
expected to be Rs 100 lac in that year’s term. In case the money that he sets
aside now is not adequate he proposes to invest an equal sum every year,
beginning one year from today to make good the shortfall. There is a
possibility that he may not be able to make the annual payments. The cost of
money can be taken as 10% per annum.

A. How much money will he have for the wedding?

B. What is the short fall that needs to be bridged to meet his

contribution?

C. In order to meet the shortfall, how much should he invest each year?

D. If he is unable to make the annual payments by how many years will

the wedding have to be extended so that money is available?

E. If the wedding cannot be postponed, and if annual investments cannot

be made, then at what rate should the present investment be made to
ensure the wedding takes place on time?

A year ago, when Dev visited his alma mater he noticed the prize money for
the best graduating student was Rs 3000/-. He was told this prize was fixed 50
years ago when an award of Rs 3000 was significant. Apparently with inflation
the amount now looked small. Dev ran through the Internet and finds that the
average inflation during the last 50 years is about 6 percent. Some analysts
have projected inflation in the coming years to be at 4%

F. What is the value of the Rs 3000 today?

G. To have been as valuable as Rs 3000 was then, what should be prize

money today?

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 H. If the person who instituted the prize money 50 years ago had created
a corpus, how much would have been the sum?

I. If Dev wants to award Rs 200,000 each year what should be the corpus
protected for inflation

J. If the first payment is to be made today, how much should be the

corpus?

When he turns 50, Dev wishes to tour Europe. He hopes that by then vacationing
would be back in fashion. Having slogged for years, he now wants to invest in an
experience. Somebody has told him the trip would cost Rs 20 lac, if he wants to
really chill it out. He intends to do just that. He also realizes that he would need
24 lacs per annum from his 55th to his 60th year, with the requirement growing at
the inflation rate of 5%. Time value of money is 10%

K. How much money should Dev set aside today to meet these needs?

L. How would the position change if the 10% per annum were to
compound half yearly? What are your inferences?

M. What would happen if the TVM drops down to 8%? What are your
inferences?

N. In real life these moneys have to be drawn at the beginning of the year.
Considering the money he has to set aside today.

O. What challenges do you foresee in these issues? Think broad.

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