Chapter 3: Questions Flashcards
PQ3.1: Anne, who is aged 20, has just started a new job with a large international company. She is hoping to be employed for most of her working life.
She wishes to construct a cashflow model to describe the incoming cashflows associated with her employment over the next thirty years.
Give a list of the questions she will need to ask in order to construct such a model. Comment on the difficulties of constructing a model in this case.
Here are some of the questions she might wish to ask. You may well be able to think of many
others.
* Is her job reasonably secure?
* How frequently is she paid?
* Is she likely to be given regular salary increases?
* Is she ambitious for promotion? Is her job (and salary) likely to change much in the future?
* Does she want a career break to bring up children at some point?
* What are her current levels of tax, and are these likely to change in the future?
* When does she plan to retire?
Determining answers to these questions will be quite difficult, given the long-term nature of the cashflow model. It is very difficult to predict what tax rates will be in three years’ time, let alone what they will be in thirty years’ time! Any sort of answers she manages to produce for any of these questions are likely to be fairly uncertain.
PQ3.2: Anne, aged 20, now wishes to extend her model to include her outgo over the next thirty years. Again, give a list of questions that she might need to ask herself in order to do this.
- Does she want to run a car?
- Does she have any other interests, hobbies etc which require expenditure?
- Does she want to buy a house, or rent for the long term?
- Does she want children at some stage?
- What are her costs of day-to-day expenditure, for example food?
- How are prices likely to change over time?
Again, there are many other questions she might wish to ask, and many other sensible ideas
you might have come up with.
PQ3.3: Anne now wishes to combine her two models. Explain how she might go about this and what the resulting model would tell her
A sensible way of combining the two models would be to ‘net off’ the expenditure cashflows against the income cashflows for each time period, providing her with a model showing her net
income (or expenditure) for each future time period. Again, she would probably only be able to do this in the most general terms, and the resulting uncertainty would be great. However, it could be a useful exercise under some circumstances. For example, it might give her some indication of periods during her life when her expenditure will exceed income (when she may need to borrow money), and of other periods where the reverse is true (and she may be able to save some of her income).
