Conceptual Calculations

Question 1

List Begin mode calculations

Answer 1

College Tuition
Retirement benefits received
Family needs

Question 2

List End mode calculations

Answer 2

401k deferrals
Profit sharing contributions
Bond interest paid
Mortgage payments

Question 3

Describe how to calculate inflation adjusted return aka “real rate of return”

Answer 3

[1+ after tax return ]
[————————— - 1] X 100
[1 + inflation rate. ]

E.g.
1.08
—— - 1 x 100 = 3.846%
1.04

Question 4

Explain the relationship of NPV and required rate of return

Answer 4

When NPV is zero, the IRR matches the required rate of return

When NPV > 0 then the investment will exceed the required rate of return and the client should purchase

In other words, the 0 = breakeven, and the higher the NPV the more the investment is worth compared to breakeven