1 CASE 2 TIME VALUE ON MONEY -FINANCIAL PLANNING Remember Kevin? Just last week, Kevin Lee was discussing with his Finance Professor friend, Phyllis Comer various ways to enable Kevin to accumulate additional money in 20 years when he reaches age 60. BACKGROUND A local insurance salesman-turned-financial-planner, Morton Lopez has suggested that Kevin borrow the equity accumulated in his home and invest it plus $30,000 of excess cash in a single-premium life insurance policy. This appeared to be quite an attractive investment until Phyllis pointed out a number of problems with this strategy and said that more money could be accumulated in a variety of ways. Phyllis also noted that Kevin had uncovered two important two extremely important facts. First, Kevin had an obvious need for some type of safe, long-term, tax-sheltered investment, and second, he has excess yearly income in addition to the money market funds that could be placed in such an investment. A review of Kevin’s situation confirms the following: a) Kevin’s life insurance situation was adequate b) It was extremely unlikely that the $30,000 of “excess” cash in the money market fund would be needed c) Kevin, due to royalties from his best-selling college textbook, could afford to have his annual income reduced by $3,052 after-tax dollars d) Finally, any funds accumulated in 20 years would be used for a possible early retirement or to defray the education expense of newborn child THE CURRENT MEETING Phyllis realizes that Kevin in interested in specific investment suggestions but thinks it is best to begin by explaining the gains from the tax-free accumulation of interest. The excess money from the money market earns 5% per year compounded monthly. Which converts to 5.12% annualized return. Since interest is taxable as it is earned each year, however, this money is only growing at a rate of 3.58% rate since Kevin is in the 30% tax bracket [Remember, rr = rn(1-t)]. This means that $60,623 after-tax dollars…