Project Description: The goal of this project is to help you plan for your financial future. The first step in creating a plan is to derive your cash flow. In this project, your planning horizon is 3 years. The starting point of your cash flow is the first month after you graduate. The provided Excel program lists all the data categories that you need to know to create your cash flow. You should use the Excel program to create the following scenario.

QUESTION

Project Description:

The goal of this project is to help you plan for your financial future. The first step in creating a

plan is to derive your cash flow. In this project, your planning horizon is 3 years. The starting

point of your cash flow is the first month after you graduate. The provided Excel program lists all

the data categories that you need to know to create your cash flow. You should use the Excel

program to create the following scenario. You start your life after graduation with a full time job

that pays $54,000 a year after deducting federal income taxes, state income taxes, Medicare

fees (tax), and Social Security fees (tax). Your salary increases by 3% every year.

You are free to determine the value of every other revenue (income) or cost (expenses) item. All

the entered values must be close to reality and actual values (what happens in real life). You

must enter values for all basic items such as food, medical, etc. Leaving these items as zero will

generate a zero grade for your project. You must also take into account that the prices of basic

goods increase every year due to inflation. So the costs that you enter for these items must

show an increment of at least 2% per year. Perform the following steps:

1‐ Calculate the PW and AW of your 3‐year cash flow using interest rate scenarios of 2%.

2‐ Calculate the ROR of your cash flow given a reinvestment rate of 5%.

3‐ How much in savings you should have at the time of graduation in order to make sure that

your cumulative cash flow during the three‐year planning horizon will not become negative.

For all the items above, you must show the complete calculations and the answers to the

questions. Everything must be typed. We need two files from you: 1) your Excel file 2) A Word

file that describes your answers to the questions above.

ANSWER

Financial Future Planning: Cash Flow Analysis for a 3-Year Horizon

Introduction

Planning for a secure financial future is essential for individuals as they embark on their professional journeys. In this project, we aim to assist in creating a comprehensive cash flow analysis over a 3-year planning horizon. By leveraging an Excel program, we will derive a realistic scenario starting from the first month after graduation. This analysis will consider various factors such as income, expenses, taxes, inflation, and investment returns. The outcome of this project will help individuals make informed decisions and determine the financial steps necessary to achieve their goals.

Calculating Present Worth (PW) and Annual Worth (AW)

The first step in this financial planning endeavor is to determine the PW and AW of the cash flow. To achieve this, we consider an interest rate scenario of 2%. The Excel program will enable us to input data categories such as income, taxes, expenses, and inflation rates (Maleke, 2019). By calculating the PW, we can assess the current value of the projected cash flow over the 3-year period. Furthermore, by determining the AW, we can understand the annualized value of the cash flow, providing a clearer perspective on the financial situation year by year.

Rate of Return (ROR) Calculation

Next, we aim to calculate the ROR of the cash flow, considering a reinvestment rate of 5%. By applying this rate, we can determine the potential growth of the invested funds and evaluate the overall performance of the cash flow (Fernando, 2023). The ROR offers valuable insights into the profitability and effectiveness of the financial plan, indicating whether it aligns with the desired objectives and expected returns.

Ensuring a Positive Cumulative Cash Flow

To safeguard the financial well-being throughout the 3-year planning horizon, it is crucial to determine the required savings at the time of graduation. By assessing the projected income, expenses, taxes, and inflation, we can calculate the minimum savings required to prevent a negative cumulative cash flow (Tamplin, 2023). This calculation ensures that individuals have sufficient funds to cover their expenses, account for unforeseen circumstances, and maintain a positive financial trajectory.

Conclusion

In summary, this project provides a comprehensive cash flow analysis aimed at assisting individuals in planning their financial future. By utilizing an Excel program and considering realistic factors such as income, expenses, taxes, inflation, and investment returns, we can derive a holistic understanding of the projected cash flow over a 3-year horizon. The calculations of PW, AW, ROR, and required savings enable individuals to make informed decisions, set achievable goals, and adapt their financial plans accordingly. By undertaking such analysis, individuals can pave the way towards a secure and prosperous future.

References

Fernando, J. (2023). Internal Rate of Return (IRR) Rule: Definition and Example. Investopedia. https://www.investopedia.com/terms/i/irr.asp 

Maleke, M. (2019). Format for Spreadsheet Functions on Excel. Johannesburg. https://www.academia.edu/38527709/Format_for_Spreadsheet_Functions_on_Excel 

Tamplin, T. (2023). Retirement Cash Flow Planning | Definition, Strategies, Benefits. Finance Strategist. https://www.financestrategists.com/retirement-planning/retirement-cash-flow-planning/