CRPC Practice Exam 1 Questions with
Complete Solutions
Mary Goodwin's financial situation is as follows:
Cash/cash equivalents$15,000
Short-term debts$8,000
Long-term debts$133,000
Tax expense $7,000
Auto note payments $4,000
Invested assets $60,000
Use assets $188,000
What is her net worth? - ANSWERS-Assets = $263,000; liabilities = $141,000, so net worth is
$122,000. Taxes and auto note payments appear on the cash flow statement. 1-3
Salaries$70,000
Auto payments$5,000
Insurance payments$3,800
Food$8,000
Credit card balance$10,000
Dividends$1,100
Utilities$3,500
Mortgage payments$14,000
Taxes$13,000
Clothing$9,000
Interest income$2,100
,Checking account$4,000
Vacations$8,400
Donations$5,800
What is the cash flow surplus or (deficit) for Bill? - ANSWERS-Income = $70,000 + $1,100 +
$2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 + $14,000 + $13,000 + $9,000
+ $8,400 + $5,800 = $70,500, so there is a surplus of $2,700. The checking account and credit
card balances would be on the statement of financial position.
LO 1-3
correct statements about income replacement percentages - ANSWERS-Income replacement
percentages are typically much higher for those with lower preretirement incomes.
Income replacement percentages vary between low-income and high-income retirees.
Income replacement ratios should not be used as the only basis for planning.
Income replacement ratios are useful for younger clients as a guide to their long-range planning
and investing.
The inverse of Option I is true. Those with a lower preretirement income typically need a much
higher income replacement percentage in retirement.
LO 1-4
If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their
retirement date in 25 years (rather than an amount that grows with inflation each year), what
level annual end-of-year savings amount will they need to deposit each year, assuming their
savings earn 7% annually? - ANSWERS-Set your calculator to the "End" mode and "1 P/Yr."
Inputs: FV = 2000000, I/YR = 7, N = 25, PV = 0, then PMT = $31,621
,1-4
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per
month at the beginning of each month. Over the 12 remaining years of their preretirement
period, they expect to generate an average annual after-tax investment return of 8%; during
their 25-year retirement period, they want to assume a 6% annual after-tax investment return
compounded monthly. They want to start their monthly retirement withdrawals on the first day
they retire.
What is the lump sum needed at the beginning of retirement to fund this income stream? -
ANSWERS-The monthly retirement income need is not specified as "today's dollars," and no
inflation rate specified; therefore, it must be assumed that the $2,500 net monthly income need
represents retirement dollars, and the retirement period income stream is level. To calculate the
lump sum needed at the beginning of retirement, discount the stream of monthly income
payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N]
6 [I/YR]
0 [FV]
Solve for PV = $389,957
LO 1-4
Chris and Eve Bronson have analyzed their current living expenses and estimated their
retirement income need, net of expected Social Security benefits, to be $90,000 in today's
dollars. They are confident that they can earn a 7% after-tax return on their investments, and
they expect inflation to average 4% over the long term.
, Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund
their retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of
retirement income deficit25number of periods until retirement4%% inflation rateFuture value
of income deficit in first retirement year$239,925
(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value
of income deficit in first retirement year)30number of periods in retirement
The lump sum needed at the beginning of the - ANSWERS-This PVAD calculation requires that
the calculator be set for beginning-of-period payments. First, the annual retirement income
deficit is expressed in retirement-year-one dollars, resulting in a $239,925 income deficit in the
first retirement year. This income deficit grows with inflation over the 30-year retirement
period, and the retirement fund earns a 7% return.
The calculator inputs are
$239,925, [PMT];
30, [N];
2.8846, [I/YR]. (1.07/1.04)-1 x100
Solve for [PV],
to determine the retirement fund that will generate this income stream. If you enter 2.8846
directly into the calculator, you will get $4,911,265. If you use the equation to compute I/YR,
and then hit the I/YR button you will get $4,911,256. Either way the answer is clear. The
difference is that when you calculate the I/YR, the calculator takes the interest rate out to nine
decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four
decimal places.
LO 1-4
Complete Solutions
Mary Goodwin's financial situation is as follows:
Cash/cash equivalents$15,000
Short-term debts$8,000
Long-term debts$133,000
Tax expense $7,000
Auto note payments $4,000
Invested assets $60,000
Use assets $188,000
What is her net worth? - ANSWERS-Assets = $263,000; liabilities = $141,000, so net worth is
$122,000. Taxes and auto note payments appear on the cash flow statement. 1-3
Salaries$70,000
Auto payments$5,000
Insurance payments$3,800
Food$8,000
Credit card balance$10,000
Dividends$1,100
Utilities$3,500
Mortgage payments$14,000
Taxes$13,000
Clothing$9,000
Interest income$2,100
,Checking account$4,000
Vacations$8,400
Donations$5,800
What is the cash flow surplus or (deficit) for Bill? - ANSWERS-Income = $70,000 + $1,100 +
$2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 + $14,000 + $13,000 + $9,000
+ $8,400 + $5,800 = $70,500, so there is a surplus of $2,700. The checking account and credit
card balances would be on the statement of financial position.
LO 1-3
correct statements about income replacement percentages - ANSWERS-Income replacement
percentages are typically much higher for those with lower preretirement incomes.
Income replacement percentages vary between low-income and high-income retirees.
Income replacement ratios should not be used as the only basis for planning.
Income replacement ratios are useful for younger clients as a guide to their long-range planning
and investing.
The inverse of Option I is true. Those with a lower preretirement income typically need a much
higher income replacement percentage in retirement.
LO 1-4
If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their
retirement date in 25 years (rather than an amount that grows with inflation each year), what
level annual end-of-year savings amount will they need to deposit each year, assuming their
savings earn 7% annually? - ANSWERS-Set your calculator to the "End" mode and "1 P/Yr."
Inputs: FV = 2000000, I/YR = 7, N = 25, PV = 0, then PMT = $31,621
,1-4
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per
month at the beginning of each month. Over the 12 remaining years of their preretirement
period, they expect to generate an average annual after-tax investment return of 8%; during
their 25-year retirement period, they want to assume a 6% annual after-tax investment return
compounded monthly. They want to start their monthly retirement withdrawals on the first day
they retire.
What is the lump sum needed at the beginning of retirement to fund this income stream? -
ANSWERS-The monthly retirement income need is not specified as "today's dollars," and no
inflation rate specified; therefore, it must be assumed that the $2,500 net monthly income need
represents retirement dollars, and the retirement period income stream is level. To calculate the
lump sum needed at the beginning of retirement, discount the stream of monthly income
payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N]
6 [I/YR]
0 [FV]
Solve for PV = $389,957
LO 1-4
Chris and Eve Bronson have analyzed their current living expenses and estimated their
retirement income need, net of expected Social Security benefits, to be $90,000 in today's
dollars. They are confident that they can earn a 7% after-tax return on their investments, and
they expect inflation to average 4% over the long term.
, Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund
their retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of
retirement income deficit25number of periods until retirement4%% inflation rateFuture value
of income deficit in first retirement year$239,925
(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value
of income deficit in first retirement year)30number of periods in retirement
The lump sum needed at the beginning of the - ANSWERS-This PVAD calculation requires that
the calculator be set for beginning-of-period payments. First, the annual retirement income
deficit is expressed in retirement-year-one dollars, resulting in a $239,925 income deficit in the
first retirement year. This income deficit grows with inflation over the 30-year retirement
period, and the retirement fund earns a 7% return.
The calculator inputs are
$239,925, [PMT];
30, [N];
2.8846, [I/YR]. (1.07/1.04)-1 x100
Solve for [PV],
to determine the retirement fund that will generate this income stream. If you enter 2.8846
directly into the calculator, you will get $4,911,265. If you use the equation to compute I/YR,
and then hit the I/YR button you will get $4,911,256. Either way the answer is clear. The
difference is that when you calculate the I/YR, the calculator takes the interest rate out to nine
decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four
decimal places.
LO 1-4
