Project 3_ Simulation

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School

University Of Denver *

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Course

MISC

Subject

Business

Date

May 8, 2024

Type

pdf

Pages

6

Uploaded by SargentNarwhal4359 on coursehero.com

Due Jun 2 by 11:59pm Points 120 Submitting a file upload Start Assignment PROJECT 3: SPREADSHEET MODELING & SIMULATION PURPOSE OF ASSIGNMENT The goal of this project is to provide you with a realistic case problem experience setting up a spreadsheet model and simulation to facilitate retirement planning. The project fulfills these learning outcomes of the class: 1. Construct appropriate quantitative models for a variety of business problems using a spreadsheet environment. 2. Apply quantitative techniques and spreadsheet tools to derive a set of conclusions from these models. 3. Evaluate conclusions and perform what-if analysis to gain insights about the business problem. 4. Analyze and interpret conclusions and insights, and communicate this intelligence to decision makers using appropriate data visualization, reporting, and presentation techniques. 5. Continue to develop the critical thinking and problem solving skills necessary to produce a business decision or recommendation from a data set. ASSIGNMENT INSTRUCTIONS CASE PROBLEM: Arrow Consulting Will you be able to retire when you want? What will your retirement account be worth when you plan to retire? How much of your salary should you invest now and over time to reach your targeted account value? The Human Resources Department at Arrow Consulting was asked to develop a financial planning model that would help employees address these questions. Kieran Gosby was asked to lead this effort and decided to begin by developing a financial plan for himself. Kieran has a degree in business analytics and, at the age of 40, is making $85,150 per
year. Through contributions to his company's retirement program and the receipt of a small inheritance, Keiren has accumulated a portfolio with a current value of $55,000. Keiren plans to work 20 more years and hopes to accumulate a portfolio valued at $1,000,000. Can he do it? Kieran began with a few assumptions about his future salary, his new investment contributions, and his portfolio growth rate. He assumed a 5% annual salary growth rate and plans to make new investment contributions at 6% of his salary. After some research on historical stock market performance, Kieran decided that a 10% annual portfolio growth rate was reasonable. Using these assumptions, Kieran developed an Excel worksheet that provides a financial projection for the next five years. In computing the portfolio earnings for a given year, Kieran assumed that his new investment contribution would occur evenly throughout the year, and thus half of the new investment could be included in the computation of the portfolio earning for the year. From the worksheet, we see that, at age 45, Kieran is projected to have a portfolio valued at $124,437. Arrow Consulting Age 40 Current Salary $85,150 Current Portfolio $55,000 Annual Investment Rate 6.00% Salary Growth Rate 5% Portfolio Growth Rate 10% Year Beginning Balance Salary New Investment Earnings Ending Balance Age 1 $55,000 $85,150 $5,109 $5,755 $65,864 41 2 $65,864 $89,408 $5,364 $6,855 $78,084 42 3 $78,084 $93,878 $5,633 $8,090 $91,806 43 4 $91,806 $98,572 $5,914 $9,476 $107,197 44 5 $107,197 $103,500 $6,210 $11,030 $124,437 45 Kieran’s plan was to use this worksheet as a template to develop financial plans for the company’s employees. The data in the spreadsheet would be tailored for each employee, and rows would be added to it to reflect the employee’s planning horizon. After adding another 15 rows to the worksheet, Kieran found the amount that he could expect to have in his portfolio after 20 years. Kieran then took his results to show his boss, Eden Krystkowiak. Although Eden was pleased with Kieran’s progress, she voiced several criticisms. One of the criticisms was the assumption of a constant annual salary growth rate. She noted that most employees experience some variation in the annual salary growth rate from year to year. In addition, she pointed out that the constant annual portfolio growth rate was unrealistic and that the
actual growth rate would vary considerably from year to year. She further suggested that a simulation model for the portfolio projection might allow Kieren to account for the annual random variability in the salary growth rate and the portfolio growth rate. After some research, Kieran and Eden decided to assume that the annual salary growth rate would vary from 0% to 5.1% and that a uniform probability distribution would provide a realistic approximation. Arrow Consulting's accountant suggested that the annual portfolio growth rate could be approximated by a normal probability distribution with a mean 9.85% and a standard deviation of 4.9%. With this information, Kieren set off to redesign his spreadsheet so that it could be used by the company’s employees for financial planning. Managerial Report Play the role of Kieran Gosby and develop a simulation model for financial planning. Write a report for Kieran’s boss and at a minimum, include the following: 1. Without considering the random variability, extend the current worksheet to 20 years. ( Hint: Do the math for the first five years.) Determine the expected value using the constant annual salary growth rate and the constant portfolio growth rate. Confirm that the value is $807,130. Then determine what would Kieran’s annual investment rate have to increase to in order for his portfolio to reach a 20-year, $1,000,000 goal? ( Hint: Use Goal Seek.) 2. Redesign the spreadsheet model to incorporate the random variability of the annual salary growth rate and the annual portfolio growth rate into a simulation model. Assume that Kieran is willing to use the annual investment rate that predicted a 20-year, $1,000,000 portfolio in part 1. Show how to simulate Kieran’s 20-year financial plan. Use results from the simulation model to comment on the uncertainty associated with Kieran reaching the 20-year, $1,000,000 goal. 3. What recommendations do you have for employees with a current profile similar to Kieran’s after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate? 4. Assume that Kieran is willing to consider working 25 more years instead of 20 years. What is your assessment of this strategy if Kieran’s goal is to have a portfolio worth $1,000,000? 5. Discuss how the financial planning model developed for Kieran Gosby can be used as a template to develop a financial plan for any of the company’s employees. Limit your report to one page. Include any needed tables and graphs in an appendix. Your submission should include your report and your Excel file. The Excel file will only be used to verify your work. The report should include all information the Eden needs.
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