Assume 360-day year and 30-day month in your analysis
Salary scalar 3.33
Your clients, both just turned 40, will retire when they turn 62. They have a current salary at an annual rate of ($10,000*salary scalar + $100,000), being paid equally at the end of each month. They expect a 3% raise in their salary every year until they retire. They deposit 12% of their monthly salary in their 401(k) account that generates an annual rate of return of 10%, compounded daily. In addition, their employer matches their contribution with 5% of their monthly salary to the same 401(k) account.
1. Determine the cash flows pattern of the monthly contributions to the 401(k) account within each year; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER, used in your analysis. Also, calculate the yearend value of the 401(k) contributions for each year. Verify your work for Years 1 and 2 only with either the formula or the financial calculator approach!
2. Determine the pattern of the year-end values of the 401(k) contributions across years; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER, used in your analysis. Also, calculate their 401(k) account balance upon their retirement. Verify your work with the formula approach.