The purpose of this assignment is to allow you to apply the concepts we have learned in class to real-life situations.    

Consider the following scenario and then write a paper that addresses all of the questions that follow the scenario. Your paper should be approximately 250 words. This scenario can also be found on page 469 of the textbook.  

Like many married couples, Morgan and Thomas Jensen are trying their best to save for two important investment objectives: (1) an education fund to put their two children through college; and (2) a retirement nest egg for themselves. They want to set aside $100,000 per child by the time each one starts college. Given that their children are now 10 and 12 years old, Morgan and Thomas have 6 years remaining for one child and 8 for the other. As far as their retirement plans are concerned, the Jensen’s both hope to retire in 20 years, when they reach age 65. Both Morgan and Thomas work, and together, they currently earn about $90,000 a year.  

The Jensen’s started a college fund some years ago by investing $6,000 a year in bank CDs. That fund is now worth $65,000. They also have $50,000 that they received from an inheritance invested in several mutual funds and another $20,000 in a tax-sheltered retirement account. Morgan and Thomas believe that they’ll be able to continue putting away $6,000 a year for the next 20 years. In fact, Morgan thinks they’ll be able to put away even more, particularly after the children are out of school. The Jensen’s are fairly conservative investors and feel they can probably earn about 6 percent on their money. Ignore taxes for the purpose of this exercise.  

Critical Thinking Questions  

1. Use Worksheet 11.1 in your textbook to determine whether the Jensen’s have enough money right now to meet their children’s educational needs. That is, will the $65,000 they’ve accumulated so far be enough to put their children through school, given they can invest their money at 6 percent? Remember, they want to have $100,000 set aside for each child by the time each one starts college.

2. Regarding their retirement nest egg, assume that no additions are made to either the $50,000 they now have in mutual funds or to the $20,000 in the retirement account. How much would these investments be worth in 20 years, given that they can earn 6 percent?

3. Now, if the Jensen’s can invest $6,000 a year for the next 20 years and apply all of that to their retirement nest egg, how much would they be able to accumulate given their 6 percent rate of return?

4. How do you think the Jensen’s are doing with regard to meeting their twin investment objectives?  Explain your answer.