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Your Aunt Rose and Uncle Bill are approaching retirement and they go to an investment adviser at Merrill Lynch to discuss their investment options. They expect to have $800,000 in retirement savings and plan to purchase an annuity that will generate income of $40,000 per year for the rest of their lives. The advisor claims that she could get them a higher annual income because she “knows” how to invest their savings in financial instruments that can yield at least 10% per year. Bill and Rose want you to provide a “second opinion” of the analysis done by their Merrill Lynch advisor, Ms. Shelia Young. Specifically, they want you to write a memo to Ms. Young that compares the two alternatives and highlights the risks and benefits of each alternative. They feel certain that Ms. Young is not giving due consideration to assumptions and variables that will impact their decision, but they don’t know how to articulate their concerns to her. Therefore, since you speak “finance” they would like you to prepare this memo on their behalf. What additional information do you need to know in order to make a valid analysis of your aunt and uncle’s goals?

Your Aunt Rose and Uncle Bill are approaching retirement and they go to an investment adviser at Merrill Lynch to discuss their investment options.  They expect to have $800,000 in retirement savings and plan to purchase an annuity that will generate income of $40,000 per year for the rest of their lives.  The advisor claims that she could get them a higher annual income because she “knows” how to invest their savings in financial instruments that can yield at least 10% per year.
Bill and Rose want you to provide a “second opinion” of the analysis done by their Merrill Lynch advisor, Ms. Shelia Young.  Specifically, they want you to write a memo to Ms. Young that compares the two alternatives and highlights the risks and benefits of each alternative.  They feel certain that Ms. Young is not giving due consideration to assumptions and variables that will impact their decision, but they don’t know how to articulate their concerns to her.  Therefore, since you speak “finance” they would like you to prepare this memo on their behalf.
What additional information do you need to know in order to make a valid analysis of your aunt and uncle’s goals?

Memo  Format
To:        Ms. Sheila Young
From:          [Your name]
Subject:     Comparison of Retirement Options

Your memo must contain the following sections:
1.    Introduction – identify yourself and explain the motivation for this memo.
2.    Methodology – explain how you intend to evaluate the two options.  Please include in your analysis:
a.    Specific explanation and justification for the particular valuation technique(s) that you will use.
b.    All assumptions used in the valuation model(s).  Be sure to note any potential weakness/limitation imposed on the valuation method that arise from a particular assumption.
3.    Analysis
a.    Please provide comparisons of the two options under at least two different scenarios of your choosing (e.g., “optimistic” vs. “pessimistic” economic environment).
b.    Provide clear documentation of all calculations that are referenced in your narrative.
4.    Recommendation/Conclusion
a.    Which option would you recommend? Why?
b.    Which option would you reject? Why?

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