dfp module 2 appendix

MONARCH INSTITUTE PTY LTD

DFP Module 2 - Appendix

Investments

Document: Module 2: Investments Planning

Identifier: DFP 1203

Insert page 1 of

APPENDIX 1 – WHAT DOES A RATINGS AGENCY DO?



WHAT DOES A RATINGS AGENCY DO?

The information below is taken from the Moodys website at www.moodys.com

Moody's credit analysis focuses on the fundamental factors and key business drivers

relevant to an issuer's long-term and short-term risk profile. The foundation of

Moody's methodology rests on two basic questions:

1. What is the risk to the debtholder of not receiving timely payment of principal and

interest on this specific debt security?

2. How does the level of risk compare with that of all other debt securities?

Moody's measures the ability of an issuer to generate cash in the future.

Determining the predictability of future cash generation is therefore the primary

focus of Moody's analysis. This determination is built on a careful analysis of the

individual issuer and of its strengths and weaknesses compared to those of its peers

worldwide. An examination of factors external to the issuer is also conducted,

including industry- or country-level trends that could impact the entity's ability to

meet its debt obligations. Of particular concern is the ability of management to

sustain cash generation in the face of adverse changes in the business environment.

MOODY’S RATING PROCESS

In the course of the rating process, a Moody's analyst:

• Gathers information sufficient to evaluate risk to investors who might own

or buy a given security,

• Develops a conclusion in committee on the appropriate rating,

• Monitors the security on an ongoing basis to determine whether the rating

should be changed, and

• Informs the marketplace of Moody's actions.



The rating process involves an active, ongoing dialogue between the issuer and

Moody's analysts. Once published, Moody's ratings are continuously monitored and

updated through dialogues and regular meetings, during which issuers are encouraged

to raise any concerns and present all materials that are pertinent to the analysis.

If an issuer is new to Moody's, the rating process begins with an introductory meeting

or teleconference call. The purpose of this initial discussion is to introduce Moody's

rating process and methodology, and to provide additional information regarding the

specific sorts of data that will be most useful in developing an understanding of the

organization. Our goal is to be as transparent as possible, and to ensure that issuers

understand Moody's rating methodology and process.

1) Meeting with Management

For a first-time rating, the initial rating meeting is generally held at a company's head

office location, and may last from a half day to a full day. Depending upon the nature

of the entity being rated, site visits may also be involved. The Moody's analyst will

discuss the meeting agenda with the issuer in advance of the meeting, to ensure the

issuer is aware of the type of information Moody's typically receives at such a meeting.

The discussion at the rating meeting will generally focus on the following subjects:

• Background and history of the company/entity

• Industry/sector trends

• National political and regulatory environment

• Management quality, experience, track record, and attitude toward risk-

taking

• Management structure

• Basic operating and competitive position

• Corporate strategy and philosophy



• Debt structure, including structural subordination and priority of claim, and

• Financial position and sources of liquidity, including

o cash flow stability and predictability and ability to service debt

obligations,

o operating margin, and

o a balance sheet analysis in terms of debt profile and maturity.

Following the meeting, the Moody's analyst will continue with the analysis, and will

generally conduct further discussions with the issuer in order to obtain follow-up

information and clarification. Upon completion of the analysis, the Moody's analyst

will make a recommendation to a Moody's rating committee.

2) Moody's Rating Committee

A credit rating is forward-looking, and, by its very nature, subjective. The role of the

Moody's rating committee is to introduce as much objectivity into the process as

possible by bringing an understanding of the relevant risk factors and viewpoints to

each and every analysis. For all sectors, the rating process is guided by a common set

of basic analytical principles, including global consistency, an emphasis on qualitative

factors, and a focus on the long-term.

For a first-time rating, the lead analyst will convene a rating committee once all

analysis has been completed. It is his/her responsibility to include as many credit risk

professionals as necessary who have the appropriate knowledge and experience to

address all of the analytical perspectives relevant to the issuer. Factors considered in

determining the make-up of a rating committee may include the size of the issue, the

complexity of the credit, and the introduction of a new instrument. Also taken into

account are any issues that will have ramifications in the market or any relevant

sovereign issues. Moody's goal is to integrate the decision-making process on a global

basis, to facilitate worldwide ratings consistency.



The role of the lead analyst at the rating committee meeting is to present the rating

recommendation and rationale, and to ensure that all relevant issues related to the

credit are presented and discussed. The discussions of Moody's rating committee are

strictly confidential, and only Moody's analysts may serve on them.

3) Rating Process Timeline

Moody's rating process, from the time of the preliminary discussion to the public

release of the rating, takes approximately 60-90 days. However, Moody's is sensitive to

issuers' needs and timing concerns, and will be as flexible and responsive as possible in

order to accommodate tighter financing schedules and other requirements.

4) Rating Dissemination and Publication

"Once the rating committee has made its decision, the issuer will be informed of the

rating and Moody's rationale. For a public rating, the new rating is distributed by press

release simultaneously to the major financial media worldwide. This press release will

also appear on Moody's global website www.moodys.com, as well as other relevant

regional and local Moody's websites."

5) Right of Refusal of the Moody's Rating in Asia Pacific

Moody's provides first-time rating applicants with the ability to determine whether

their ratings will be made public, subject to certain limitations, in the event of a debt

issuance by the applicant in any of the international capital markets at a later date. If

applicants choose not to have their rating published, then both Moody's and the

applicant will keep the rating confidential. Companies will not be permitted to disclose

their Moody's rating on a selective basis.



6) Treatment of Confidential Information

Moody's recognizes that an issuer's trust in the confidential nature of the rating

relationship is an essential component of the rating process. Confidential information

will not be publicly disclosed, but, if relevant, will be used in the formulation of the

public rating opinion.

7) On-Going Relationship

Following assignment and publication of the rating, Moody's will meet with

management at least annually, or more frequently as events and industry

developments warrant. The Moody's analyst will maintain regular contact with the

issuer both electronically and via the telephone, and will be available at all times to

respond to an issuer's needs or questions. Following publication of the press release

announcing the initial assignment of the rating, Moody's will publish quarterly

summary opinions on the issuer. For certain very active issuers, an annual in-depth

analysis will also be published. Press releases will be issued to announce any

subsequent rating actions or outlook changes.

MOODY’S RATING METHODOLGY

Moody's analyzes all relevant risk factors and viewpoints in arriving at a rating

opinion. Several analytical principles guide the process, including:

1) Focus on the long term - Moody's analytical focus is on fundamental factors that

will drive an issuer's long-term ability to meet debt payments, such as major economic

downturns, a radical change in management strategy, or major regulatory

developments. The ratings are not intended to ratchet up and down with business or

supply-demand cycles or to reflect short-term market movements.

2) Emphasis on stability and predictability of cash flow - One of Moody's main

analytical concentrations is on understanding the drivers of cash flow generation and,

in particular, the predictability and sustainability of cash flow. Moody's will conduct

financial analysis to determine an issuer's cash flow resilience in the event of an

economic downturn.



Specific risk factors likely to be weighed in a given rating will vary considerably by

sector. Detailed methodology reports for all major sectors that we follow can be

obtained in the Rating Methodologies section of this site.

THE BENEFITS OF A MODDY’S RATING

There are several ways in which investors use ratings that, in turn, provide value to

issuers. For many investors, ratings are a critical element in pricing securities and are

often used as a benchmark for setting investment guidelines. With dependable,

globally comparable opinions on credit risk in hand, institutions may be open to a

wider variety of securities investments from a broader array of firms.

1) Wider Access to Capital

Moody's credit opinions are widely disseminated, broadly used and clearly understood

by institutional investors in Asia and throughout the world, making an issuer's debt

more attractive to a wider range of potential buyers. In today's global markets, a rating

is effectively a "credit passport" that can provide access to both domestic and

international pools of debt capital.



2) Financing Flexibility

This wider market access typically translates into reduced funding costs, particularly

for higher-rated issuers. The credibility of Moody's ratings may also allow rated issuers

to enter the capital markets more frequently and more economically and to sell larger

offerings at longer maturities.

3) Market Stability

Moody's ratings and research reports help to maintain and stabilize investor

confidence, especially during periods of market stress. For example, a news item could

adversely affect the prices of a company's outstanding bonds, even if the news has no

real impact on the bonds\' long-term creditworthiness. The reassurance of a Moody's

rating and accompanying analysis of the situation can help to alleviate investor

concerns about this type of "headline risk".



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APPENDIX 2 – AMP CORE PROPERTY FUND INVESTOR FLYER

AMP Capital

Core Property Fund

Why invest in property?

Property is a large and diverse asset class that includes a broad range of sub-sectors including

residential buildings, office buildings, business parks, hotels, industrial, shopping centres, retirement

villages, self storage, laboratories and hospitals. These investments may be accessed directly through

ownership vehicles such as trusts or syndicates and indirectly through property portfolios listed on

public markets. Investing in property can provide a number of benefits for investors:

Stable, reliable income streamsOver the long term, the majority of property returns come

from rental income which is generally less volatile than capital

returns, as rents are contracted under a lease agreement.

To further reduce risk, a property portfolio is ideally comprised

of properties with good tenant diversification and staggered

lease maturities.

Inflation hedgingSome real estate leases contain provisions for rental increases

to be indexed to inflation, while in other cases there is an

opportunity to increase rental rates whenever a lease term

expires and the tenant is renewed. Either way, real estate

income should keep pace with inflation, giving an investor

the potential to maintain real returns.

Tangible assetsInvesting in property provides exposure to tangible assets

such as shopping centres and office buildings, and the value

of the land on which they are built, which generally performs

in line with key economic drivers such as consumer spending

and employment.

DiversificationAs different property sectors have different risk and return

characteristics, investing in a strategic mix of listed and

direct property may provide investors with a better risk

adjusted return.

Listed property has the potential for higher returns and

is more liquid but has a higher correlation to equities, while

direct property provides excellent diversification benefits

due to its stable incomes and relatively low correlation with

other asset classes (traditional investment vehicles such

as stocks and bonds), helping to reduce volatility and risk

in an investment portfolio.

Global investment opportunitiesFrom a global perspective, as more countries introduce real

estate investment trust (REIT) structures, there are even

greater opportunities for global investment and portfolio

diversification. Since 1990 new entrants to the market have

included the UK, Germany, Singapore, Canada, Malaysia and

Japan and countries currently under consideration include

emerging markets Brazil, China and India.

Improving investment conditionsAs with many other asset classes, property was adversely

affected by the global financial crisis. The increased cost of

borrowing affected companies’ ability to purchase property

and refinance existing assets, rising unemployment decreased

demand for commercial property and affected firms’ ability

to lease space and there was negative investor sentiment.

All these factors led to a fall in valuations.

In AMP Capital’s view we are now moving into a new phase

in the investment cycle which is expected to present some

significant opportunities in the coming years.

In the listed property markets, companies have moved

their focus from balance sheet issues to underlying real

estate fundamentals (demand, supply and pricing) and new

acquisitions to provide earnings growth. More equity issuance

and initial public offering (IPO) activity is expected in 2010,

generating new investment opportunities.

In direct property markets, valuations appear to be at or

close to a bottom as space demand and supply fundamentals

improve, selling pressure abates and investor demand

increases. In recent months some quality direct properties

have seen upward revaluations. In the Australian office sector,

vacancies are expected to peak in 2010/11.

Introducing the AMP Capital Core Property Fund

The Fund offers investors access to a well-diversified property portfolio through a single fund.

It invests in direct and listed assets across local and global markets in key property sectors including

office, retail, industrial and residential.

A diversified property portfolioAs an open-ended hybrid property fund, the Fund invests

in a strategic mix of property assets, with a target asset

allocation of 50% in direct property and 50% in Australian

and global listed property.

Direct propertyThe portfolio invests in premium, established blue-chip

property assets that would be unattainable for most retail

investors due to the amount of capital required. These assets

include some of the busiest shopping centres in Australia

such as Warringah Mall, as well as premium office buildings

such as NAB House and Angel Place in Sydney, and Collins Place

in Melbourne. The Fund also has a small exposure to global

property assets through the Global Direct Property Fund.

This underlying fund currently provides access to investments

in the North American and European property markets.

Australian listed property The listed portion of the Fund provides investors with access

to liquid, high-yielding Australian property securities. The

Blackrock Wholesale Indexed Australian Listed Property Fund

offers a cost efficient way to access the Australian property

market through its passive index management strategy.

Global listed property More than three quarters of the Australian listed property

market is concentrated in the top five stocks. Investing

in global listed property provides more diverse geographical

investment opportunities and access to a broader range

of property sectors, such as hotels and residential property

which are difficult to access in Australia. The AMP Capital

Global Property Securities Fund invests in real estate

investment trusts (REITs) and property securities listed on

stock exchanges in North America, Europe, and Asia Pacific.

AMP Capital Core Property Fund

Blackrock Wholesale

Indexed Australian

Listed Property Fund

AMP Capital

Global Property

Securities Fund

Direct property opportunities

Target range

Underlying Funds

Property held

directly

AMP Capital Wholesale Office Fund

AMP Capital Shopping Centre Fund

AMP Capital Hedged Global Direct Property Fund

Direct property 30−70% Australian and global listed property 30−70%

Key Fund benefits

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8Return on $1 since 1 July 2005 (inception)

Core Property Fund

Mercer Australian Unlisted Property Fund Index

UBS Global Real Estate Investors Index

ASX 200 Listed Property Trust Index

2005 2006 2007 2008 2009

Blending direct and listed property helps smooth returnsThe Fund is designed as a full cycle investment with the aim

of providing investors with smoother, more stable performance

by diversifying between global and Australian listed property

and direct property. As direct and listed markets perform

differently at different times, this blend provides the potential

for more stable income and capital growth than investing

in just one type of property investment. This is demonstrated

in the below graph, which shows the performance of the

Fund compared to the Australian and global listed property

and Australian direct property sectors from 1 July 2005 to

31 December 2009.

Access to quality direct propertiesThe Fund’s direct property investments are in quality, well

located properties with lengthy and secure income streams.

For example, as at 31 December 2009 the average asset size

in the AMP Capital Shopping Centre Fund was $349 million

and the average vacancy rate was just 0.34%. In the AMP Capital

Wholesale Office Fund, 12 out of 14 properties are classified

as premium or grade A. This means properties must offer

good views, onsite undercover parking, access to an attractive

street setting, a lobby and high quality presentation and

maintenance.

Growth potential and liquidity from investment in Australian and global REITs Investing in listed property securities provides greater portfolio

liquidity than investing in direct property alone.

This allows the Fund to make tactical movements to take

advantage of market opportunities, both in Australia and

globally. It also provides the potential for capital growth

as the value of the properties in the portfolio (and their

share prices) rise.

Regular revaluationsDirect assets in the Fund are regularly revalued by a panel

of independent external valuers to more accurately reflect

the current value of the portfolio. This has enabled us to take

a more effective ‘mark to market’ approach and provide

greater transparency to our investors.

Daily pricing with monthly withdrawalsIn 2009 the Fund changed from quarterly to monthly

withdrawals to provide greater certainty and allow clients

more ready access to their funds. To the extent that available

funds are insufficient to meet the month’s withdrawal

requests, each request will be scaled back on a pro-rata basis.

Active managementKey to AMP Capital’s success as a leading property manager

is our active management process. At Fund level we combine

long-term strategic asset allocation with short-term tactical

allocation between sectors and geographies. At direct property

level we not only operate physical assets, but also manage

responses to macro and micro drivers which involves tenant

management, leasing, efficiency and environmental upgrades.

With our affiliate AMP Capital Brookfield, we also apply active

management to our global listed property portfolio in a process

that covers screening and idea generation through to portfolio

construction, allowing timely responses to changes in market

conditions and optimisation of investment opportunities.

Relative returns since inception as at 31 December 2009

Source: AMP Capital. Past performance is not a reliable indicator of future performance.

Why AMP Capital? The offer at a glance

Investment objective

To provide regular income and capital growth and

a total return (income and capital growth) on a rolling

three-year basis, after costs and before tax, above the

Fund’s performance benchmark while accepting a

medium level of volatility over the long term.

Benchmark

The weighted return of the indices listed below

(under weightings indicated):

• Mercer/IPD Australian Pooled Property Fund Index – 50%

• S&P/ ASX 300 Property Accumulation Index – 25%

• UBS Global Real Estate Investors Index – 25%

Suggested minimum investment timeframe

5 years

Distributions

Aims to pay quarterly

Buy/Sell spread

Buy spread: 0.17%

Sell spread: 0.17%

Management fee

1.1% plus a 20% performance fee for Class A clients and

1.4% plus a 20% performance fee for Class H clients.*

* The management costs include any management fee charged by the underlying investment managers.

Contribution/withdrawal fee

Nil

Hedging policy

The Fund’s exposure to global listed property and global

direct property will be hedged back to Australian dollars.

AMP’s involvement in property dates back to 1962 when

it completed Sydney’s first sky-scraper, now home to the

AMP head office. From this time, AMP Capital has had

extensive experience managing, developing and leasing

property investments on behalf of superannuation funds

and wholesale investors, and today manages over

$20 billion in assets.

AMP Capital has a team of sector specific property

managers who are supported by experts from all areas

of property management. This wider team includes

specialists in debt advisory, investment strategy and

research and transactions, among others. We have over

80 property investment professionals based in Sydney.

Exposure to global listed property securities is via the

AMP Capital Global Property Securities Fund which is

managed by AMP Capital Investors and AMP Capital

Brookfield. Together they represent AMP Capital’s

specialist global listed real estate and infrastructure

securities capabilities. We use ‘on the ground’ investment

specialists based in Sydney, Chicago, London and Hong

Kong to identify the key opportunities in these regions.

NS5

46

0 0

3/1

0

Important note

Investors should consider the Product Disclosure Statement (PDS) available from AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) for the AMP Capital Core Property Fund before making any decision regarding these funds. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making any decision whether to acquire, or continue to hold, or dispose of any units in the Fund. Permanent Investment Management Limited (ABN 45 003 278 831) (AFSL 235150) being the responsible entity of the Fund and the issuer of units in the Fund. Permanent has not prepared this information and makes no representation or warranty as to the accuracy or completeness of any statement in it. To invest in the Fund, you and you clients will need the Fund’s current Product Disclosure Statement (PDS) issued by Permanent and available from AMP Capital on its website. The PDS contains important information about investing in the Fund and it’s important you and your clients read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. You and your client should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

The Lonsec Limited (“Lonsec”) ABN 56 061 751 102 rating (assigned February 2009) presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s). It is not a recommendation to purchase, sell or hold the relevant product(s), and you should seek independent financial advice before investing in this product(s). The rating is subject to change without notice and Lonsec assumes no obligation to update this document following publication. Lonsec receives a fee from the fund manager for rating the product(s) using comprehensive and objective criteria.

To the extent that any ratings, opinions or other information of Standard & Poor’s Information Services (Australia) Pty Ltd (ABN: 17 096 167 556, Australian Financial Services Licence Number: 258896) (“Standard & Poor’s) constitutes general advice, this advice has been prepared by Standard & Poor’s without taking into account any particular person’s financial or investment objectives, financial situation or needs. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance. Ratings can change or cease at any time and should not be relied upon without referring to the meaning of the rating. For more information regarding ratings please call S&P Customer Service on 1300 792 553 and also refer to Standard & Poor’s Financial Services Guide at www.fundsinsights.com. Each analytic product or service of Standard & Poor’s is based on information received by the analytic group responsible for such product or service. “S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc. © 2009 Standard & Poor’s Information Services (Australia) Pty Limited

Contact us

Advisers

To find out more about the AMP Capital

Core Property Fund, or how your clients can

access this investment opportunity, please

contact your AMP Capital Key Account

Manager or call our Adviser Services team

on 1300 139 267

Personal Investors

To find out more about the AMP Capital

Core Property Fund, please talk to your

adviser or call us on 1800 188 013.

Or visit our website

www.ampcapital.com.au



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APPENDIX 3 – BALANCED FUNDS FACT SHEETS

www.bt.com.au

June 2011

BT Multi-manager Balanced Fund

Fund objective The Fund aims to maximise returns above inflation with a medium risk of fluctuations in capital values in the short term and provide an overall return which exceeds its benchmark over five years or more. Investment approach The Multi-manager funds allow you to select a single investment option that diversifies across asset classes, investment managers and investment management styles. This diversification helps reduce overall risk and aims to improve consistency of returns by minimising the impact on overall performance resulting from any one style, asset class or manager. Manager selection The BT Multi-manager funds are built, monitored and rebalanced by Advance Investment Solutions – who research, select and blend investment managers from around the world and actively manage the strategy, manager selection and performance of the funds. Advance Investment Solutions regularly meets with the investment managers and conducts an intense investigation of everything, from their investment philosophy and current market views, to how well the investment manager’s team is working together or how they would react in periods of high volatility.

Fund facts Minimum suggested investment period 3 years Date of inception March 2003 Risk profile Balanced Product size ($m) $196.9 Management fee 1.80% pa APIR code BTA0077AU

Performance vs benchmark (% pa)

Investment returns are retail – net of fees. The benchmark for the Fund is created from a blend of indices based on the

Fund’s exposure to different asset classes. Details of the particular market indices used for the Fund’s benchmark can be found on BT Online.

Asset allocation

Latest portfolio update Growth assets posted modest falls over the June quarter as investor risk aversion stemming from social unrest, political instability and economic fragility led investors to realign their portfolios in favour of defensive assets. The Fund continued to run a slight overweight position to growth assets during the quarter, with the holdings of equities and commodities above the neutral benchmark allocation. The performance of the Fund was in line with the benchmark return with sector allocation variance having little impact on overall performance whilst manager selection decisions detracted slightly from the Fund’s return. The largest positive contribution by asset class from manager selection came from within active global equities and diversified property.

-1.60

10.60

0.91 0.08

5.44

-1.19

10.81

2.22 2.43

7.49

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

3 months 1 year 3 years 5 years Since inception

Fund Benchmark

Australian Equities 32.80%

International Equities 21.70%

Asian Equities 2.98%

Defensive Alternative Assets 2.07%

Growth Alternative Assets 9.85%

Listed Property 6.13%

Fixed Interest 4.89%

Int Fixed Interest 9.89%

Cash 9.68%

BT Funds Management Limited ABN 63 002 916 458 is the responsible entity of the Multi-manager Balanced Fund (Fund) and is the issuer of units in the Fund. A Product Disclosure Statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or online at www.bt.com.au . You should obtain and consider the PDS before deciding whether to acquire, or continue to hold, units in the Fund. This fact sheet has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Total returns for the Fund are calculated to the last day of each month using exit prices. Total return figures assume distributions are reinvested and issuer fee and expenses are deducted but contribution fees (where payable) and taxes are not. Returns are historical and past performance is not a reliable indicator of future performance. This fact sheet is updated quarterly and is accurate at the time of publishing. We may change the investment characteristics of the Fund at any time.

The second quarter of 2011 delivered lacklustre returns with global industrial production being disrupted due to the natural disasters suffered by Japan. Also affecting investor confidence was the deteriorating social, political and economic conditions of southern Europe, Northern Africa and the Middle East. This led to the rotation in favour of defensive assets at the expense of growth assets. Global equity markets registered modest falls in the second quarter returning -2.8% as measured by the MSCI World ex Australia Index (in Australian dollar terms). The Australian dollar moved 3.8% higher against the US dollar, whilst on a trade-weighted basis the Australian dollar appreciated 2.0%. The Australian equity market performed poorly as the strong Australian dollar, heightened market volatility caused by global natural disasters and global political and social unrest led to investors reducing their risk appetites. The S&P/ASX 200 Accumulation Index declined 4.0% over the quarter, underperforming both the local currency and the unhedged global equities indices. Global property markets did manage to hold onto some of the gains from the first quarter, although struggled during the quarter, making up losses in the last week of June and posting a return of 2.9% (hedged in Australian dollars). In addition, the macro uncertainty may have increased the likelihood of continued low interest rates in the developed economies, providing further support for real assets with stable income, such as real estate. Strong cash flows in the first part of the quarter, and merger and acquisition activity in the listed real estate market provided further support for global REIT share prices. Australian LPT Index underperformed global property stock having recorded a fall of 0.5% over the quarter. The Australian bond market posted a slight gain over the quarter as bond yields moved lower across the entire curve. The RBA kept the official cash rate unchanged at 4.75% with further rate hikes anticipated sometime over the remaining months of 2011. The UBS Australian All Maturities Index posted a gain of 2.3%. Global sovereign bond yields moved lower over the quarter as economic data out of the US and leading European nations showed signs of sluggish economic conditions. This led to investor rotation, into the relative safety of global bonds and out of risky growth assets. The Barclays Global Aggregate Bond Index (Hedged) returned 2.9% over the quarter.

Managers

Australian Equities BT Northcape Ausbil Schroders

Alleron Celeste Contango Tribeca

International Equities

AQR MFS Trilogy Tradewinds Lion

Schroders Lazard Mellon State Street

Property

Perennial European Investors CBRE

Alternative Assets Advance Alternative Strategies

Credit Suisse Grosvenor

Australian Fixed Interest

CFS

Perennial

International Fixed Interest

Standish Mellon Franklin Templeton

Wellington

Cash IMS Kapstream

Fund facts Fund benefits

Benchmark: Balanced Growth Index

Buy / Sell spread:

Investment style: Active, fundamental, disciplined, value

Suggested minimum investment period: Five years or longer

Total returns % (after fees) as at 31 August 2011

1 mth 3 mths 6 mths 1 yr 3 yrs pa 5 yrs pa 7 yrs pa 10 yrs pa

Perp. WealthFocus Investments -1.6 -4.3 -4.1 2.9 -1.5 -0.3 3.8 3.9

Perp. WealthFocus Investment Advantage -1.5 -4.2 -4.1 2.8 -1.5 -0.5 3.7 3.7

Perp. WealthFocus Super -1.4 -3.8 -3.6 2.9 -0.9 0.0 3.9 3.9

Perp. WealthFocus Pensions -1.5 -4.1 -3.9 3.2 -1.0 0.1 4.3 4.3

Perp. WealthFocus Term Allocated Pension -1.5 -4.1 -3.9 3.2 -1.0 0.1 4.3 4.3

Balanced Growth Index -1.7 -4.1 -4.1 2.7 0.2 1.1 5.1 4.6

Growth of $10,000 since inception (WFI Fund) Portfolio sectors¹

Top 10 stock holdings¹Commonwealth Bank of Australia

BHP Billiton Limited

Westpac Banking Corporation Asset allocation ranges¹Telstra Corporation Limited Min. Target Max.

ANZ Banking Group Limited Australian shares 10 28 50

Coal & Allied Industries Limited International shares 10 28 50

Orica Limited Property 0 5 15

Fletcher Building Limited Fixed income 5 10 35

Alumina Limited Enhanced cash 0 13 30

Rio Tinto Limited Other investments 0 16 30

Past performance is not indicative of future performance. Returns may differ due to different tax treatments.

PER0017AU

PER0036AU

1.95%

PER0100AU

0.34% / 0.00%

APIR

August 2011

Investment objective: To provide investors with long term capital growth and income

through investment in a diversified portfolio with an emphasis on Australian and

international share investments.

Mgmt cost:

Provides investors with access to a diverse

range of growth and income producing assets.

Active management and asset allocation

techniques are employed in order to further

enhance the fund's return and manage risk.

PER0334AU

PER0015AU

Australian shares, 31.5%

International shares, 28.1%

Property, 5.8%

Fixed Income, 9.9%

Cash & Enhanced cash, 7.8%

Other investments, 16.8%

$8,000

$12,000

$16,000

$20,000

$24,000

May-99 May-01 May-03 May-05 May-07 May-09 May-11

Fund Benchmark

What are...?

Further informationAdviser Services 1800 062 725

Investor Services 1800 022 033

Email [email protected]

www.perpetual.com.au

This publication has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL No 234426. It is general information only and is not intended to

provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your

circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.The PDS for the relevant fund, issued by PIML,

should be considered before deciding whether to acquire or hold units in that fund. The PDS can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au. No

company in the Perpetual Group* guarantees the performance of any fund or the return of any investor's capital. Total return shown for the fund(s) have been calculated using exit prices

after taking into account all of Perpetual's ongoing fees and assuming reinvestment of distributions. No allowance has been made for entry or exit fees or taxation (except in the case of

superannuation funds). Past performance is not indicative of future performance.The Balanced Growth Fund gains its exposure to Australian Shares by investing in an underlying Australian

Share Fund/s which primarily invests in Australian listed or soon to be listed shares but may have up to 20% exposure to stocks outside Australia. The investment guidelines showing the

Fund's maximum investment in international shares do not include this potential additional exposure. Short positions may be part of the underlying Australian Share Fund's strategy.

Currency hedges may be used from time to time.

* Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries.

The following funds are not open to new investment: Perpetual's Balanced Growth Fund Nil Entry Fee Option.

¹ Fund information in this document is relevant to the Wholesale option unless stated.

When making asset allocation decisions, we

consider three key indicators being cycle, value

and technical. This process evaluates the impact

of the earnings cycle on Australian equities, the

business cycle on domestic bonds, and analyse

valuations, while also incorporating market

sentiment through technical analysis. These

indicators combine to either increase exposure to

an asset class when market conditions become

favourable or reduce exposure if market

conditions are becoming adverse.

Did you know?

Perpetual’s investment philosophy for investing in balanced portfolios is to focus on the

fundamental drivers of returns from quality

investments rather than on asset classes

themselves. We believe investment in internal

capability where we have the demonstrated

ability to consistently add value is a lower risk

and more reliable approach to meeting investors’ objectives. We also believe that our focused,

active approach to asset allocation and our

proven disciplined investment style has the

ability to add value to investors over time.

Active asset allocation is a portfolio management

strategy that changes a portfolio’s asset allocation to take advantage of market conditions

in the short term. Using a disciplined active asset

allocation process offers the potential for both

enhanced returns and reduced levels of risk.

Why PerpetualPerpetual is one of Australia’s most experienced investment services groups, with an enduring

passion for protecting and growing our clients’ wealth.

Founded in Sydney in 1886 as Perpetual

Trustees, we’ve helped generations of Australians invest and manage their wealth

through all market conditions.

Perpetual process

Market commentary Global equities fell 4.8% in August. A slowdown in global growth and concerns over sovereign debt in Europe sent stocks lower. The Australian market fell by 10.0% early in the month, before rallying to end the month down 2.0%. This was the fifth consecutive month of negative performance. The August domestic reporting season delivered mixed results with resources experiencing the largest increases in profit growth, followed by the banks. Credit markets endured one of the most volatile months in August since the fallout from Lehman Brothers. Amid heightened volatility and extreme risk aversion, August observed credit spreads reflective of a broad-based global recession.

Asset allocation Asset allocation added value over the month. Allocation to equities was initially held slightly underweight. However, the equity market sell off early in the month caused equities to become more attractively valued. This resulted in the portfolio moving to a neutral equity position. Momentum remained negative throughout most of the period. We started the month with a small overweight to fixed income, but remained close to neutral for the remaining period. Over the month Australian bond prices rallied sharply following the downgrade of the US Government’s credit rating. The resulting fall in yields meant that bonds became expensive relative to inflation expectations.

Stock selection Stock selection was positive for equities. One of the reasons the Australian equities portfolio outperformed was its holding in Coal & Allied. During the month Coal & Allied received a joint takeover offer from Rio Tinto and Mitsubishi Corporation at $122 per share. The offer was later increased to $125 per share, valuing the company at $10.8 billion. The global equities portfolio also outperformed. This was due to its more defensive positioning. Contributors to performance included Johnson & Johnson, Nestle, Tesco PLC, and Philip Morris. Johnson and Johnson delivered better sales growth in its Pharmaceutical and Consumer segments and is one of the best-managed large-cap healthcare companies. The fixed income portfolio underperformed. An underweight position to supranationals and semi-government securities contributed to performance during the month. The portfolio’s overweight to credit detracted from performance. This was due to a broad based widening of credit and swap spreads. This was partially offset by strong running yields.

Outlook We are mindful that global equities face some challenges in the short to medium term. The US Federal Reserve has the ability to implement monetary easing in the form of QE3 to appease the market, but Europe is likely to remain the focus of uncertainty as the growth picture deteriorates perhaps to the point of tipping back into a mini-recession. Asia and China look more favourable in this context and we expect that when reflation does return, emerging markets and commodities will bounce back meaningfully. Domestically, companies continue to be impacted by the strength of the Australian dollar, a frugal consumer and rising input costs. We continue to research and invest in companies with recurring earnings, low debt and sound management which we believe are well placed to add value over the medium to long-term. The outlook for the credit markets remains neutral. Valuations are attractive relative to historic levels. Credit fundamentals remain stronger than current spreads suggest. Domestic banks and corporates are far less exposed to the troubles facing a number of offshore counterparts. Despite having high capital levels and stronger funding profiles, subdued risk appetite has resulted in a broad based sell off among credits. These positive factors are countered by the heightened market volatility, which has been caused by an increase in risk aversion.

02 04 06 08 0 100

10-35%

5-30%

0-20%

0-15%

0-15%

0-20%

25-45%

United Capital Balanced Fund

Investment objective

To provide capital growth of your investment over the

medium to long term by investing in a diversii ed portfolio

of growth and defensive assets, and to achieve a total return

after fees in excess of the fund’s benchmark1 over a rolling

5 year period.

Investment strategy

The fund generally gains its exposure to a diversii ed

portfolio of investments through a mix of investment

managers. The balanced orientation of the fund means it

has a similar exposure to growth assets (such as Australian

and international property and equities and alternative –

growth), and defensive assets (such as cash, i xed interest

and alternative – defensive).

The fund is authorised to utilise approved derivative

instruments for risk management purposes subject to the

specii c restriction that the derivative instruments cannot

be used to gear portfolio exposure.

The underlying investment managers may utilise strategies

for the management of currency exposure. The level of

currency hedging used for the fund will vary from time to

time. The fund has the capacity to change the level and

nature of the currency overlay to manage the currency risk.

Manager information

United believes that no single investment manager can

provide superior investment performance across all asset

classes. Because of this, United adopts the multi-manager,

sector-specialist investment approach by outsourcing

the security selection function to a range of high quality

investment managers who United believes have specialised

skills and expertise at managing investments within a specii c

asset class. The sector specialist investment approach is

focussed on harnessing an investment manager’s strengths

and avoiding their weaknesses.

Notes1 The fund’s benchmark incorporates the applicable indices for each asset class

weighted against the fund’s neutral asset allocation. Refer to the ‘Asset class

benchmark indices’ table for more information.

2 Estimated management cost before performance fee. This is an estimate that

includes the responsible entity fee, the investment manager fee and estimates

of the underlying investment management fee and other fund expenses. The

amount payable may be more or less than the estimate.

3 This is an estimate. The amount payable may be more or less than the estimate.

4 Represents the full margin between the buy and sell spread.

5 Past performance are net of investment manager fees and gross of tax.

If you are a superannuation fund member, you may be investing in the fund

via a pooled superannuation trust (PST), therefore performance relating to your

investment may vary due to the ef ect of fees and income tax applied at the PST

level. Please refer to the relevant fund PDS to check if this applies to you and for

information about the fund’s investment process.

6 Property asset sector may include exposure to Australian direct property and

Australian and international property securities.

7 The MSCI World ex-Australia Index in AUD Hedged may be used from time to

time, depending on the strategic hedging ratio applied to the international

shares portfolio. The benchmark for international shares may change in future to

the MSCI All Countries World ex-Australia Index in AUD.

8 This benchmark is an asset weighted average return predominately made up of

the Commonwealth Property Fund and the AMP (Capital Investors) Investment

Linked Superannuation - Australian Core Property Portfolio.

Investment Proi le

Fund facts

Fund start date 12 April 2002

Distribution frequency Quarterly

Investment timeframe 3 years +

Estimated management cost 0.77%2

Performance Fee 0.06%3

Buy/Sell spread 0.45%4

Performance %5

1 year return as at 30 June of each i nancial year

2011 2010 2009 2008 2007

8.97 10.95 -11.78 -9.93 13.64

Investment guidelines

Range Strategic (neutral) allocation

22% Australian shares

18% International shares

10% Property6

35% Diversii ed i xed interest

5% Cash & short term securities

5% Alternative – growth

5% Alternative – defensive

Asset class benchmark indices

Asset class Benchmark

Australian shares

S&P/ASX 300 Accumulation Index

International shares

MSCI World ex-Australia Index in AUD7

Direct property

InTech Weighted Direct Property Index8

Australian listed property

S&P/ASX 300 Property Accumulation Index

International listed property

UBS Global Real Estate Investors ex-Australia Index in AUD Hedged TR

Diversii ed i xed interest & Alternative – defensive

50% – UBSA Composite Bond Index

50% – Barclays Capital Global Aggregate Bond Index (hedged in AUD)

Cash & short term securities

UBSA Bank Bill Index

Alternative – growth

MSCI World ex-Australia Index in AUD

Last updated | June 2011

United Funds Management Ltd Investor Services 1800 333 700 Website www.united.com.au

Important note: This Investment Proi le has been prepared on behalf of the IOOF group, which consists of IOOF Holdings Ltd ABN 49 100 103 722 (IOOF) and its related bodies including IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524 and Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023. It is based on general information contained in the underlying fund Product Disclosure Statement (PDS) issued by United Funds Management Ltd, which is available at www.united.com.au.

The Investment Proi le is not intended to represent investment or professional advice as it does not take into account your individual objectives, i nancial circumstances or needs. You should carefully review the PDS and consider consulting a i nancial adviser before making a decision about whether this particular investment option is appropriate for you. IOOF and its related bodies corporate are not liable for any loss or damages arising as a result of reliance placed upon the contents of this Investment Proi le. The information is given in good faith and believed to be accurate at the time.

Last updated | June 2011

United Capital Balanced FundInvestment Proi le

Underlying sector managers9 – as at 30 June 2011

Sector Manager %

Australian equities

AllianceBernstein Australia Ltd 4.15

BlackRock Investment Management (Australia) Ltd

3.63

Integrity Investment Management 4.21

Legg Mason Australia Asset Management Ltd

1.38

Merlon Capital Partners 1.79

Perennial Investment Partners Ltd 4.24

Solaris Investment Management Ltd 4.83

24.23

International equities

Axiom International Investors LLC 3.61

LSV Asset Management 4.17


State Street Global Advisors, Aust, Ltd 8.89

Wellington Management Company, LLP 2.20

19.64

Fixed interest

Loomis, Sayles & Company LP 3.18


PIMCO Australia Pty Ltd 10.50

24.50

Property Challenger Managed Investments Ltd 1.54

Colonial First State Global Asset Management

0.42

1.96

International property

Cohen & Steers Capital Management Inc 0.91

Perennial Investments Partners Ltd 2.05

2.96

Cash Perennial Investment Partners Ltd 4.05

United Funds Management Ltd 17.13

IOOF Investment Management Ltd 1.11

22.29

Alternative equities

Pantheon Ventures (Guernsey) Ltd 0.08

Lombard Partners International LLC 0.20

Crown Global Secondaries II PLC 0.08

Mount Kellett Capital Partners LP 0.08

Sector Manager %

Alternative equities (continued)

Newbury Partners LLC 0.02

Performance Equity Management LLC 0.04

BNY Mellon Asset Management 1.56

Other 0.51

2.57

Alternative debt

Credit Suisse Asset Management (Australia) Ltd

0.44

International Acceptance Ptd Ltd 0.11

Gresham Property Funds Management Ltd

0.08

AMP Capital Investors Ltd 0.80

RARE Infrastructure 0.41

EIG Global Energy Partners 0.02

1.86

Notes9 Underlying manager allocations and asset allocations rel ect the combined

indirect exposure of the Fund’s holding in other IOOF Group unit trusts and/or

direct investments.



Insert page 1 of

APPENDIX 4 – TIME VALUE OF MONEY



TIME VALUE OF MONEY

In this appendix, we revisit the time value of money examples and show you how to

answer similar questions using both a financial calculator and/or the maths formulae

that underpin the spreadhseets we used in the notes to this module.

Let’s now return to the example we used in the notes where we invested $1,000 for

four years.

We calculated what we would require in four years’ time if the interest rate was 8%

p.a. We worked out that the future value of $1,000 invested each year at a rate of 8%

p.a. was equivalent to receiving a lump sum of $1,360.49 at the end of the 4th year.

This sum of money comprised the initial sum of money, $1,000 plus interest earned

over the four year period.

Initial sum = $1,000.00

Interest in year 1 = 8% x $1,000 = $ 80.00

Interest in year 2 = 8% x ($1,000 + $80) = $ 86.40

Interest in year 3 = 8% x ($1,000 + $80 + $86.40) = $ 93.31

Interest in year 4 = 8% x ($1,000 + $80 + $86.40 + $93.31) = $ 100.78

$1,360.49

Using a financial calculator and this example, we can input the following values to

determine the future value of the investment:

PV = amount of the present sum of money ($1,000)

r = interest rate per period (8%)

n = number of periods (4)



If we select the future value key (FV) on the financial calculator, we will know that if

our opportunity cost is 8% we will require $1,360.49 in four years' time to be

indifferent between receiving the money today and waiting for the four years.

We can also use a formula to determine the future value of a single amount invested

today. This formula is as follows:

FV = PV(1 + r)n

where:




FV = Future or accumulated value

= $1,000 (1 + 0.08) 4

= $1,360.49



FUTURE VALUE OF SINGLE SUMS

Because of the nature of compounding, we can see why money is said to have a time

value: a dollar in one time period has a different value from a dollar received or paid in

a different time period. This same notion of the time value of money can enable us to

determine what some amount to be received at a future date is worth in today’s

money terms. Comparing the future value of two cash flow streams or comparing the

present value, i.e. the value in today’s money terms of those same cash flow streams

will always result in the same conclusion as to which is optimal.

Example

Sarah asks your advice about two investment options. Investment Option A and Option

B will generate the following cash flows.

Option A

End yr.1 End yr.2 End yr.3 End yr.4 End yr.5

Nil Nil $27,000 $8,000 Nil

Option B

End yr.1 End yr.2 End yr.3 End yr.4 End yr.5

Nil Nil Nil Nil $40,000

In order to compare these investment options it is necessary to consider the cash

flows at a common time period. If we compare these two investment options at the

end of Year 5, that is, the future value of both Option A and Option B, we can evaluate

which investment option is preferable.



Using a financial calculator and this example, let us assume we require a return of 8%.

We can input the following values to determine the future value of the investment:

Option A

PV = amount of the initial sum of money ($27,000)

r = required return or interest rate per period (8%)



our required return is 8%, $27,000 to be received in three years' time is equivalent to

receiving $31,492.80 in five years' time.

Plus

PV = amount of the initial sum of money ($8,000)




our opportunity cost is 8%, $8,000 to be received in four years' time is equivalent to

receiving $8,640 in five years' time.

The future value of both cash flows, $27,000 to be received in 3 years' time and $8,000

to be received in 4 years' time is equivalent to receiving a total of $40,132.80 in 5

years' time ($31,492.80 + $8,640).

Option B

The future value of $40,000 to be received in five years’ time is $40,000. Our advice to

Sarah would explain that because of the time value of money, she is better off

accepting Option A because it is providing her with more money in future dollar terms.



PRESENT VALUE OF SINGLE SUMS

Present value questions require us to consider what is the equivalent value in

today’s money terms of cash to be received at some time in the future? For

example, it might be required for issues like: a client wishes to go on a cruise in 5

years’ time. The cruise will cost approximately $8,000. How much should be

invested now at an interest rate of 7 per cent per annum in order to ensure these

funds will be available?

Alternatively, a client wishes to provide for their children’s education and needs

$12,000 per year for 6 years starting 4 years from now. If interest rates were 6.5%

p.a. how much would your client need to invest now in order to make these funds

available? What if your client could save a regular amount beginning now in order

to make those funds available? How much would need to saved each year?

To see how we use a financial calculator to answer present value questions, we will

return to the example of Sarah and the choice between Option A and Option B.

If we had compared investment Option A with investment Option B on the basis of the

value in today’s dollar terms, we would arrive at exactly the same conclusion as we did

using the future value calculation. The numbers will of course be different because we

will be comparing the value of the investments in today’s dollars but the conclusion

will be the same.

We can input the following values to determine the present value of the investment.

Option A

FV = amount of the future sum of money ($27,000)



If we select the present value key (PV) on the financial calculator, we will know that if

our required return is 8%, $27,000 to be received in three years’ time is equivalent to

receiving $21,433.47 in today’s money terms.



Plus





our required return is 8%, $8,000 to be received in four years’ time is equivalent to


The present value of both cash flows, $27,000 to be received in 3 years’ time and

$8,000 to be received in 4 years’ time is equivalent to receiving $27,313.71 in today’s

money terms ($21,433.47 + $5,880.24).

Option B





our required return is 8%, $40,000 to be received in five years’ time is equivalent to


Again our advice to Sarah would be to explain that because of the time value of

money, she is better off accepting Option A. In this analysis it is because it is providing

her with more money in today’s dollar terms.

After taking into account the time value of money, the present value of both cash

flows, $27,000 to be received in 3 years' time and $8,000 to be received in 4 years'

time is equivalent to receiving $27,313.71 in today’s money terms. For Option B,

receiving $40,000 in five years’ time is equivalent to receiving $27,223.33 in today’s

money terms.



The formula to determine the present value of future sums of money can be used to

assess Sarah’s question. This formula is the inverse of the formula used to determine a

future value from a present sum.

PV = FV

(1 + r) n

where

FV = amount of the future sum of money

r = required return or interest rate per period

n = number of periods

Applying this formula to the example for Sarah , we can determine the present value

of each cash flow stream.

Option A

PV = $27,000 + $8,000

(1 + 0.08) 3 (1 + 0.08) 4

= $27,313.71

Option B

PV = $40,000

(1 + 0.08) 5

= $27,223.33

Obviously, our advice to Sarah is identical to that which we derived by using a financial

calculator.



ANNUITIES

So far we have only considered the future value and the present value of single sums

of money. A related issue is the determination of the future value and present value

of an identical stream of receipts/payments occurring each and every period for a

specified time. A series of cash flows that are identical in amount and are occurring for

consecutive time periods is called an annuity.

Consider the following annuity with an interest rate required of 7%:

End End End End End

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

$500 $500 $500 $500 $500

If we wish to find the accumulated value (future value) of this annuity at the end of

five years, we can input the following values in our financial calculator to determine

the future value of the investment:

PMT = amount of the annuity ($500)




our opportunity cost is 7% we will require $2,875.37 in five years’ time to be

indifferent between receiving $500 each year for 5 years and receiving $2,875.37 in

five years’ time.

Alternatively, we can use the formula for the future value of an annuity to determine

the accumulated value at the end of the five years. This formula is as follows:



FV = PMTr

nr ]1)1[( −+

FV = 07.0

]15)07.01[(500$ −+

= $2,875.37

Using the same example we can determine the present value of this income stream.

To calculate the present value we would input the following values into a financial

calculator or use the formula for the present value of an annuity.





our opportunity cost is 7% we would be indifferent between receiving $2,050.10 today

or receiving $500 each year for 5 years.

Using the formula,

PV = PMTr

nr ])1(1[ −

+−

PV = $500 [ ( . ) ]

.

1 1 0 075

0 07

− +−

PV = $2,050.10



What if the cash flows do not commence at the end of year one?

The formulae we have used so far in this module and most financial calculator settings

assume the first cash flow will occur at the end of year 1 (period 1).

A complication can arise when the first cash flow is not at the end of the first year (or

period) but instead occurs immediately. An example of this might be the payment or

receipt of office rental which is usually paid (received) in advance.

Consider the following annuity with an interest rate required of 7%:

End End End End

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4

$500 $500 $500 $500 $500

Like the earlier example, there are still 5 regular payments (receipts) of $500. The

difference is however, the first of these payments (receipts) is today and the last

payment (receipt) is at the end of year 4. Consequently, we cannot input the number

of periods as n = 5 periods because the formula and financial calculator settings

assume the first cash flow will occur at the end of year 1 (n period 1).

Finding the present value of the regular payments described in this example requires

us to use a 2 step process. First we input the number of periods n = 4 periods to

determine the present value of those cash flows occurring at the end of years 1 ,2, 3

and 4 and then we add the immediate payment (receipt) of $500 to our answer as

follows:

To calculate the present value we would input the following values into a financial

calculator or use the formula for the present value of an annuity.

Step 1: Calculate the present value of the 4 regular amounts to be received at the end

of years 1, 2, 3 and 4.







our opportunity cost is 7% we would be indifferent between receiving $1,693,61 today

or receiving $500 each year for 4 years.

Step 2: Add the $500 amount to be received today (Year 0) to the answer from Step 1.

$1,693.61 + $500 = $2,193.61

Using the formula,

Step 1:

PV = PMTr

nr ])1(1[ −

+−

PV = $500 07.0

]4)07.01(1[ −+−

PV = $1,693.61

Step 2: $1,693.61 + $500 = $2,193.61

Why is the present value in example 2 ($2,193.61) more than the present value in

example 1 ($2,050.10) given both examples were based on a regular payment (receipt)

of $500 for 5 years (periods)?

The answer to this question is because the cash flows were paid (received) earlier in

our second example. Consequently, the time value of many places a greater value on

cash flows that occur earlier.



APPLICATION OF TIME VALUE OF MONEY

Understanding the concepts of compounding and the time value of money enables us

to consider the types of questions that might commonly be asked of a financial

planner.

Consider the following example that we used earlier in this module.

Example

Andrew has just turned 40 years. He has sought your advice about his plans for

retirement. Andrew would like to retire at age 65 years and he wants to have $1.5

million in an investment account at age 65 years in order to maintain his current

lifestyle. He has determined that he can afford to invest $12,000 at the end of each

year (for the next 15 years) towards his retirement. At age 55 years he will need to

withdraw $40,000 as a lump sum, because he intends to take his wife, his children and

his two grandchildren on a cruise. If Andrew’s retirement account earns 11% per

annum, compounded annually, how much will Andrew need to deposit into the

account each year for the last ten years (between age 55 years and age 65 years) to

meet his goal of having $1.5 million?

It may be useful to draw a timeline in order to see when the various cash inflows and

cash outflows are likely to occur. In the table below we have drawn a timeline.

When calculations such as these are made, it is assumed that the cash flows occur at

the end of each period (year).

Age 40 41 42 43 - 53 54 55 56 57 58 59 60 61 62 63 64 65

End of yr 0 1 2 3 -12 13 14 15 16 17 18 19 20 21 22 23 24 25

Cashflow

($,000s)

12 12 12

12 12 12

(40)

? ? ? ? ? ? ? ? ? ?

1500



To provide the advice to Andrew, we can break down the calculation into 3 steps

• Step 1 - Determine how much Andrew’s account will be worth at age 55

years.

• Step 2 - Determine the value of the amount left in the account at age 55

years if it accumulates interest until Andrew reaches age 65 years.

• Step 3 - If Andrew needs to accumulate extra funds in the years between

age 55 and age 65 years, how much will he need to deposit into his

retirement account each year?

Solving the problem

Step one - Determine how much Andrew’s account will be worth at age 55 years.

We know:

PMT = amount of the annuity ($12,000)



If we input this data and then select the future value key (FV) on the financial

calculator, we will know that the value of Andrew’s account in 15 years’ time when he

turns 55 years will be $412,864.

Once we deduct the cost of the cruise ($40,000) the balance of the account will be

$372,864.



Step two - Determine the value of the $372,864 left in the account when Andrew

reaches age 65 years.

We know:




If we select the future value key (FV) on the financial calculator, we will know that the

amount left in the account $372,864 will grow to a value of $1,058,718.

In order for Andrew to have $1.5 million, he will need to accumulate a further

$441,282.

Step Three - If Andrew is to accumulate the extra $441,282 in the years between age

55 and age 65 years, he will need to deposit the following regular amounts (annuity)

into his retirement account.

We know:




If we select the payment key (PMT) on the financial calculator, we will know that if

Andrew deposits a regular payment (annuity) of $26,389 for each of the ten years after

his 55th birthday, he will achieve his goal of having $1.5 million in his retirement

account at age 65 years.



Professional Advice: Will I Have Sufficient Funds?

Geoff and Julie have three young triplets, Robyn, Brett and Madeline. Today is 31st

December, the children’s third birthday. Geoff and Julie are discussing their plans to

provide for their children’s education. They estimate that school education will cost in

the vicinity of $8,000 per year (in today’s dollars) for each child during the six years of

secondary education. School fees are payable in advance. The children will start

secondary school in the January after they have had their 12th birthday, i.e. secondary

school commences after 9 years (start of the 10th year).

Geoff and Julie have a combined gross income of $120,000 and this is likely to increase

each year only with inflation. They have a 25-year mortgage and a car loan for

$12,000. After living expenses, tax, mortgage and car repayments, Geoff and Julie have

a surplus of about $10,500 each year. To date, they have not really saved any of this as

most of the surplus has gone towards paying off a business debt. Fortunately this debt

has been extinguished. Geoff and Julie seek your advice as to how much they will need

to have accumulated by the time the children commence their secondary schooling.

They also wish to know how much they will need to save each year over the next 9

years in order to have sufficient funds available for their children’s schooling. They

have considered investing their savings in a cash management trust because they feel

that a cash management trust will provide them with a safe investment.

Required:

1. What will you need to know in order to address the questions raised by Geoff and

Julie?

2. Advise them as to the likelihood of them having sufficient funds available for the

children’s school education and calculate how much they will need to invest each

year. Be sure to identify any assumptions that you use in making your

recommendations and address their concerns about the safety of their proposed

investment strategy.



Suggested Solution:

1. A financial planner would need to ascertain Geoff and Julie’s attitude to different

types of investments, their risk tolerance and the likelihood that the savings of

$10,500 per year is going to be stable. It would also be important to determine if

there were likely to be any large financial outlays over the foreseeable future

which might impact their ability to save.

2. The financial planner might wish to provide a comparison of savings requirements

under two scenarios - savings to be invested at 4.5% in a cash management trust,

and savings invested at say 8% through a managed investment.

One way to think about the issues facing Geoff and Julie is to consider a time line as a

means of clarifying when the cash inflows and cash outflows are expected to occur.

The Table below shows how much would need to be saved each year if the savings

period was the next 9 years, and the rates of return were 4.5% p.a. and 8% p.a.

The cash flows were determined as follows:

School costs:

Determine how much the school costs will be at the time the children commence

secondary school. This is assumed to be when they have turned 12 years of age, at the

start of the 10th year.

When we use either a financial calculator or the present value formula, we assume the

cash flows occur at the end of the year. In this example, Geoff and Julie are required

to pay the school fees in advance so we can think of a payment at the start of year 10

as being the same as a payment at the end of year 9. The payment at the start of year

11 is the same as a payment at the end of year 10 etc. In the last year of secondary

school there is no payment as the last of the 6 school payments would be made at the

start of year 15 (which is the same as the end of year 14).

To determine how much the school costs will be at the start of year 10 (end of year 9)

assuming a rate of return on invested funds of 4.5%, we can input the following into a

financial calculator:



Step 1: Calculate the present value of the 5 regular amounts to be paid at the end of

years 10, 11, 12, 13 and 14. (we do not need to find the present value of the payment

at the end of year 9 because it will be worth exactly $24,000 as there is no time gap

and hence no reduction in value)

PMT = amount of the annuity ($24,000)

r = interest rate per period (4.5%)



our opportunity cost (rate of return on invested funds) is 4.5%, $24,000 to be paid at

the end of years 10, 11, 12, 13, and 14 is equivalent to paying $105,359 at the end of

year 9 (this is the same as saying the start of year 10)

Step 2: Add the $24,000 to be paid at the end of year 9 to the answer from Step 1.

$105,359 + $24,000 = $129.359

The actual school fees that will be paid are 8 x $24,000 = $192,000 but because these

fees are paid over a 6 year period, the time value of money means this is equivalent to

paying a lump sum (present value) of $129,359 at the end of year 9 (start of year 10).

Find the regular annuity amount to be deposited each year commencing at the end of

year 1 for a 9 year period that is equivalent to an amount of $129,359 at the end of

year 9. To do this, input the following values in your financial calculator:


r = interest rate per period (4.5%)




If we select the payment key (PMT) on the financial calculator, we will know that if

Geoff and Julie deposit a regular payment of $11,975.34 each year for 9 years, they

will have $129,359 at the end of the 9th year, enough for the children’s secondary

schooling costs.

The problem with this is that Geoff and Julie can only manage to deposit a maximum

of $10,500 each year. Making regular payments over the same time period if the rate

of return is 8% p.a. will enable them to meet the schooling costs and remain within

their budget.



End of

year

Age of

triplets

School

costs

Present Value of

school costs at

start of

secondary

school

Amount to be

saved over next

9 yrs to provide

sufficient funds

if rate of return

is 4.5%

Amount to be

saved over next

9 yrs to provide

sufficient funds

if rate of return

is 8%

0 3 yrs

1 4 yrs $11,975.34 $10,359.03

2 5 yrs $11,975.34 $10,359.03

3 6 yrs $11,975.34 $10,359.03

4 7 yrs $11,975.34 $10,359.03

5 8 yrs $11,975.34 $10,359.03

6 9 yrs $11,975.34 $10,359.03

7 10 yrs $11,975.34 $10,359.03

8 11 yrs $11,975.34 $10,359.03

9 12 yrs - $24,000 $129,359 $11,975.34 $10,359.03

10 13 yrs - $24,000

11 14 yrs - $24,000

12 15 yrs - $24,000

13 16 yrs - $24,000

14 17 yrs - $24,000

15 18 yrs



Assumptions:

a) Cost of schooling remains constant in real terms

b) The interest rates used in this example are after taking into account

inflation

c) Geoff and Julie are able to save regular amounts each year

d) There are no foreseeable large purchases to be made

What we can see is that if Geoff and Julie want to ensure that they have sufficient

funds saved by the time the children commence secondary school, an investment in a

cash management trust will not provide a sufficient return to enable them to do so.

Geoff and Julie could achieve their savings over the next 9 years, if they invest their

savings in an investment that is generating an 8% return.

It would be necessary to explain to Geoff and Julie that a cash management trust

might not be the most appropriate investment vehicle as it is more suitable for those

investors who require access to their funds and/or are investing for a relatively short

term. The investment they are considering is a long term investment and as such, it

would be worthwhile considering saving via an investment that has a growth

component. This should provide them with a return that is likely to compensate for

increases in inflation and provide them with a better overall return because of the

impact of compounding. Various investment alternatives could be suggested.



Try this case study for yourself.

Case Study

Kane and Justine are considering whether or not to buy a particular property valued at

$680,000. They have $200,000 of their own funds to commit towards the purchase

and they expect to incur an additional $50,000 in fees and taxes on the purchase itself.

They are able to borrow at an interest rate of 7.20 per cent per annum with interest

compounded monthly. Loan repayments would be monthly with the first payment due

at the end of the first month after purchasing the property. The term of the home loan

is 30 years. They both work full-time earning a combined after-tax salary of $11,000

per month.

A loan affordability ratio is equal to the monthly home loan repayment divided by a

couple’s household after-tax monthly income. A key threshold for ‘mortgage stress’ is

when the loan affordability ratio reaches 35%.

a) Assess whether this couple will face mortgage stress at current interest rates.

Hint: because the interest is compounded monthly, we need to use the number of

months for the mortgage loan, not the number of years in determining the regular

payments to be made. We also need to use the monthly interest rate (7.2% /12 =

0.6%)

After 1 year, the bank informs Kane and Justine that $524,821 is still owing on your

loan.

b) How much in total have Kane and Justine paid in mortgage payments during

the first year?

c) Of the repayments, how much of the principal has been reduced?

d) How much interest have you paid in year 1?

e) If the bank now increases interest rates from 7.20 per cent to 8.40 per cent,

how does this affect Kane and Justine’s repayments and their loan affordability

ratio?



Hint: remember to use monthly interest rates. And, remember that there are only 29

years left on the loan (use months not years).



Answer to case study:

a) The regular monthly payment to be made is $3,597.58

If repayments are $3,597.58 each month, this represents ($3,597.58/$11,000)

= 32.7%

The repayments do not exceed 35% so Kane and Justine would not be considered to

be experiencing mortgage stress although they are getting close should interest rates

rise or their income fall.

b) They have paid in total $43,170.96 (12 x $3,597.58)

c) Given the amount still owing at the end of year 1 is $524,821,they have only

reduced the principal by $5,179 ($530,000 - $524,821)

d) They paid a total of $43,170.96 in mortgage payments and the principal has

only been reduced by $5,179 so the difference is the interest paid to the bank

$37,991.96

e) If interest rates increase to 8.4% per annum, the regular monthly payment

would now be $4,029.36

If repayments are $4,029.36 each month, this represents ($4,029.36/$11,000) = 36.6%

The repayments now exceed 35% so Kane and Justine would be considered to be in

the category described as those experiencing mortgage stress.

Advanced Case Study

Financial Planners use financial mathematics in both simple and more complicated ways to conduct

client scenario-based analysis.

While scenario-based analysis is commonly now performed via specific financial planning software,

the software is still performing financial mathematics. And like any ‘program’, it is important not to

blindly trust an answer, but to actually understand the building blocks of the software that produces

the answer. That process starts with understanding financial maths.

Let’s have a look at a typical (…but complex) client scenario that financial planners are often asked to

provide advice on by a client, on a regular basis.

A typical client concern – am I on track to reach my retirement goals?

Clients often want to know whether they are on track to be able to retire. In order to be able to

provide that answer for a client, you will need to ask the right questions. The majority of these

questions nevertheless are contained within the Client Questionnaire. You will recall we covered the

Client Questionnaire in Module 1 of the Diploma of Financial Planning for your reference.

Step 1

You need to understand how much money the client needs to live on once they decide to retire.

Make sure you tell them to give you the amount in today’s dollars. It should also be calculated

annually. This is subjective of course. Some people will think $50,000 is too much, while others will

decide $100,000 is too little.

A few points to remember in helping clients determine this amount are to recommend they

complete a budget if they are unsure about their current or future spending. You will recall we

addressed budgeting in Module 1 of the Diploma of Financial Planning.

Let’s say for the purposes of this case study that your client says they need to live on $60,000 in

today’s dollars in retirement. Assume this amount is net of tax. Once you study superannuation and

retirement in detail in module 3, it will be clear most income can be derived either tax free or very

tax effectively in retirement using the right superannuation strategy.

Step 2

You then need to ask your client ‘when’ they want to retire. You need a specific time frame - for

example “in 8 years’ time”. The question is asked because you need to determine the lump sum they

will require in the year they wish to retire. This lump sum is required to provide the retirement

income over your client’s lifetime.

Let’s say for the purposes of this case study your client tells you they want to retire in 8 years’ time.

Step 3

You are now in a position to start calculating the client’s future needs. There are several calculations

you need to undertake. In addition, you need to clarify a few more questions with your client as you

progress throughout this step.

Given you have been told your client requires $60,000 in today’s dollars, you need to determine

what $60,000 is equivalent to in 8 years’ time. This is a future value of a lump sum calculation. You

should apply a rate of inflation to grow this amount by 8 years (say 3.5%). Hence you have

PV=$60,000, n=8 and r=.035 and you are solving for FV. The answer is $79,009

The next part of this process is to assume you are now at a time period that is 8 years from today –

your client’s retirement date has arrived! You now know your client requires $79,009 each year from

retirement indexed with inflation so their purchasing power is maintained. As you know this is

equivalent to $60,000 in today’s dollars. You now need to calculate the present value lump sum

required to produce $79,009 each year over your client’s lifetime. This is a present value of an

annuity calculation.

Before commencing the calculation a few additional questions need to be asked of your client. You

need their life expectancy to work out the period they need their money. This is the “n” (i.e. period

of time) in the present value of an annuity formula. You can refer to life expectancy tables to do this

(noting women have a higher life expectancy than men). The problem of course is these tables are

merely averages. Obviously, you and your client would want a margin for error (hoping of course

your client lives beyond their “expectancy”). So we always add around 10 years to a life expectancy

to be conservative. You also need to ask your client if you want the lump sum you are determining

they will need in 8 years’ time to be completely exhausted by the time they die, or whether they

want an inheritance available for their nominated beneficiaries. That will determine whether you put

zero into the future value (“FV”) section of the formula or an amount equal to the inheritance they

have nominated.

Let’s assume for the purposes of this exercise you have chosen a life expectancy of 32 years and you

have also put aside an amount of $250,000 after 32 years from retirement to act either as an

inheritance or a ‘safety net’ should the client live beyond that.

Ok, to summarise, you now have the ongoing payment (“PMT”) determined which is $79,009

commencing in 8 years’ time from today. You have the period (“n”) being 32 years from retirement,

and you have the future value (“FV”) being $250,000 in 32 years from retirement or 40 years from

today. You now need to solve for the present value (“PV”) of the annuity in 8 years’ time (i.e.

retirement date), BUT you need to determine one last thing. You need to determine the return (“r”)

you will use in the formula. That is, what average return would be required to produce a lump sum

to pay $70,009 indexed with inflation at retirement over 32 years leaving an inheritance of

$250,000? You should speak to the client and discuss the return you will be including in the formula.

It should be consistent with the returns you have indicated the client should expect over time, based

on their completed risk profile questionnaire. You can refer to what a risk profile is in Module 1 of

the Diploma of Financial Planning.

Let’s assume you indicate to the client (based on their risk profile and the fact their money will be to

fund their retirement) that an average gross annual nominal return of 7% is realistic over time. You

now need to adjust this nominal return to take into account an estimated inflation rate to allow the

$79,009 over 35 years to maintain its purchasing power. Assuming you use an inflation rate of 3.5%,

we can roughly say the real return (“r”) (after inflation) is approx. 3.5% which is our last variable

required to calculate the lump sum required at retirement to produce the income your client

requires. Using these inputs, the Present Value (“PV”) = $1,589,759

Step 4

You now know your client requires $1,589,759 at retirement to meet their objectives to live on

$60,000 in today’s dollars in retirement. Given your client wants to retire in 8 years’ time, this step

allows you to determine the lump sum required today to reach your client’s goal. In other words is

your client on track or is there a deficit and what might you be able to do to plug the gap in the

intervening 8 years.

This a present value of a lump sum question. You now have the future value (“FV”) being $1,589,759

and the period (“n”) being 8 years. You can also use a return rate that is consistent with the risk

profile your client is prepared undertake with respect to their existing investments over the next 8

years. Let’s assume its 7%.

The present value required by your client to reach their lump sum they require in 8 years to achieve

their retirement goals is $925,254

Conclusion

If your client has an amount greater than $925,254 today, they are on track to reaching their

retirement aims…fantastic! If they have a deficit, then they might need to save money over the next

8 years or reduce their expectations about the income they can comfortably live on, or a

combination. Additional calculations can be conducted to analyse those possibilities which is beyond

the scope of your course. Again, financial planning software provides all these modelling scenarios in

a user friendly format, but knowing how scenarios are derived is very important. Well done if you

understood everything!



Insert page 1 of

APPENDIX 5 – TIPS FOR USING EXCEL SPREADSHEETS

1

I . Overview of the Excel Work Space

♦ Titles, Windows, and Worksheets

The title bar at the very top of your Excel screen reminds you that you're in Excel. If

your workbook is expanded to take up the maximum amount of screen space, its title

bar is merged with Excel's title bar to look like this: Microsoft Excel - Book1. If your

workbook is taking up less than the maximum amount of screen space it's displayed in

its own window with its own separate title: Book1.

Book1 is the default name for an Excel workbook until you assign it another name.

Book1 is composed of multiple worksheets. Take a look at the bottom of the Book1

window to see the tabs labeled Sheet1, Sheet2, Sheet3, etc. Use the mouse to click any

one of these tabs to move that worksheet to the top of the display.

Right-click any tab to get a “pop-up menu” of options specific to the tab. For example,

one of the options is “Rename”. Click the Rename option to put the selected tab’s

name in reverse video. Type a different name and hit the enter key to change the tab’s

name.

2

Change the order of worksheets by dragging and dropping a tab from one location to

another. Delete a tab by clicking the tab to select it, right clicking, and selecting

“Delete” from the pop-up menu that displays.

3

♦ Menus

Excel's menu appears across the top of the workspace. The menu is a part of Excel's

workspace and is separate from the workbook in which you create worksheets, charts,

and other objects.

The menus are arranged to lead you to the option you need. Select any top-level menu

entry by clicking it with the mouse or holding down the ALT key and tapping the

underlined letter for your choice. Excel displays a further set of options using a drop-

down menu list. Selections with a diamond to the right of them lead to other drop-

down lists. Menu selections with ellipses after them lead to a dialog box that collects

information Excel needs to carry out your command.

There are times when the menu contents may change. For example, if you're working

with a chart the menus reflect choices relevant to the InfoWindow or the charting

environment.

Choose the commands View, Toolbars,

Customize to open the “Customize” dialog.

Choose the “Options” tab. On that tab you

can control whether Excel positions the

Standard and Formatting toolbars together

as well as whether Excel uses its “most

recently used” option for menu items. If

you like seeing the menu items in the same

place each time you open a menu, toggle

off this option.

Tip

Move or copy a worksheet with the

commands Edit, Move or Copy Sheet.

Indicate what workbook you want

the sheet to be in.

Click the “Create a copy” box at the

bottom of the dialog if you want to

5

♦ Formula Bar

The formula bar appears under the menus and any toolbars you might have open at

the top of the screen. It reflects the contents of whatever cell is the current cell in the

worksheet. The left of the formula bar shows the cell reference or the cell name if the

cell has been assigned a name. At right is a display of the cell's contents. If your cell

contains a formula, the worksheet cell shows the value of the evaluated formula while

the formula bar displays the formula’s contents (E.g., the formula itself).

♦ Toolbars

Excel has more than a dozen preconfigured toolbars. The button icons on a toolbar are

generally shortcuts to commands you might otherwise issue using the menus or with

keystrokes. Toolbars appear as strips or boxes of icons located around the edge of your

worksheet or floating on its surface.

When you start Excel you see the Standard toolbar, with icons for frequently-used

tasks such as file open, print, copy and paste, formatting, functions, charting, etc. To

display more toolbars, use the commands View, Toolbars and select the toolbars you

want displayed from the dialog box that appears. Turn off toolbars the same way.

Toolbar Display Shortcut

If you have at least one toolbar displayed, here’s a shortcut to

displaying and hiding toolbars: Right-click anywhere in the gray

toolbar area at the top of the Excel window (but not directly on a tool

button). Excel displays a drop-down list of almost all its toolbars.

Click any toolbar name in this list to display it (if hidden) or to hide it

(if displayed).

6

Move the mouse pointer to the top edge of an icon on a toolbar to have Excel display a

“tooltip” , or a short description of what that icon does.

“Grab” a toolbar by holding the left-hand mouse button on a space on the toolbar but

not directly on a tool button. Drag to any location in the workspace where you want

the toolbar to be.

Reshape any toolbar by dragging with the

mouse on an end or side. For example, you

may prefer to have all the tools in a toolbar

in a box, like the one at left.

♦ Status Bar

At the very bottom of the Excel workspace is the status bar. Keep an eye on the status

bar for information about the status of your session or a particular operation. For

example, if you have the num lock key on and the caps lock key on, Excel displays the

words NUM and CAPS in the status bar.

The status bar is also useful for getting on-the-fly calculations about spreadsheet

values. In the example below, highlighting the range of numbers in column A displays

their sum (the default) in the status bar.

7

Right-click the “Sum” report in the status bar to change the status bar calculation to

one of the other options: Average, Count, Count Nums, Max, or Min.

♦ Worksheet Referencing Scheme

The worksheet part of the screen is arranged as a grid of rows and columns. An

individual cell in the grid is named by the intersection of the numbered rows and

lettered columns. For example, starting at the upper left-hand corner (the worksheet

“home” position) a cell two columns over and four columns down is named cell B4.

If you prefer, you can turn on an alternative “R1C1” style of referencing where both

rows and columns are numbered. To do this, select Tools, Options, General and select

the “R1C1 reference style” under “Settings” . If you make this selection, both rows and

columns have numbers as names. For example, with this scheme, the name for cell A5

becomes R5C1. The R1C1 referencing style is used mostly in macro writing.

♦ For More Information

Click Help on the top-level menu and choose Microsoft Excel

Help to display either the Office Assistant or Excel’s online

help guide (depending on your Excel configuration).

If using the Office Assistant, enter “workbooks and

worksheets” as the help topic.

8

If using the online help guide, choose the “Contents” tab and select the item Working

with Workbooks and Worksheets.

I I . Basic Data Entry

♦ Entering Text and Numbers

Click with the mouse on the cell in which you want to enter data to make that cell the

current cell. Begin typing the entry for that cell. When your entry is complete, hit the

enter key.

Excel automatically left justifies text and right justifies numbers, but you can easily

override these defaults with formatting commands.

Notice that while you're typing an entry into a cell, the entry also displays in the

formula bar. Any time you make that cell the current cell, the cell's contents display in

the formula bar. If you enter a formula in the cell, the formula itself displays in the

formula bar while the evaluated result of the formula displays in the worksheet.

♦ Editing an Entry

9

To edit the contents of a cell double-click the cell with the mouse. Excel changes the

mouse pointer to a vertical edit bar within the cell. Change the cell contents and then

hit the enter key to exit cell edit mode.

Alternatively, make the cell you want to edit the current cell. Then click the mouse in

the formula bar and perform the edit operation in the formula bar instead of in the cell

itself.

If your copy of Excel is configured differently and you want to change edit modes,

choose Tools, Options to open the “Options” dialog and then select the “Edit” tab.

♦ Deleting an Entry

Make the cell whose entry you want to delete the current cell. Then hit the Delete key

to delete the cell's contents.

Delete the contents of a range in the same way you’d delete the contents of a single

cell.

10

♦ Adding or Deleting a Row or Column

It’s easy to make changes to your spreadsheet layout by adding or deleting rows or

columns. For example, to add a single column, click the header of the column to the

right of where you want the new column to be located. The entire selected column

will appear in reverse video. Select Insert, Columns from the main menus and Excel

adds a new column to your worksheet. To insert more than one column at a time

select more than one column header before choosing the menu instructions. Inserting

an additional row or rows works the same way. Select the row or rows below where

you want the new row to be located.

Delete a row or column by selecting its header and clicking Edit, Delete or hitting the

Delete key.

I I I . Select ion

♦ Selecting More Than One (Contiguous) Cell

You might want to select a range of cells to perform the same operation on all of them

with a single command. To do this, click a cell at one corner of the range of cells you

want to select. Make sure the mouse pointer is a wide crosshair shape (not an arrow).

Then hold down the left mouse button and move the mouse over the worksheet to

include the cells you want selected. Reverse-highlighting indicates which cells are

selected. The cell you started out with is the only one that doesn't appear in reverse

11

highlighting.

Tip

To select a very large range, one that’s not conveniently visible all at

once on the screen, here’s an easier way than dragging with the

mouse From the menus select Edit, Go to. In the dialog box that

displays enter the address of the range you want to select in the

“Reference” box. For example, A1:Q109. Click OK and Excel selects

12

♦ Selecting Non-contiguous Cells

Excel makes it easy to select noncontiguous cells. Select the first cell or range of cells

you want to include. Then hold down the CTRL key and move the mouse pointer to

select a noncontiguous cell or range. Repeat as many times as necessary, holding

down the CTRL key the entire time, to select all the cells/ ranges you want.

You can also use the same Edit, Go to option described in the tip above. In this case,

enter in the “Reference” box the addresses of all the ranges and cells you want to

select, separated by commas. For example:

Tip: Click the Special button on the “Go To” dialog to select particular classes of

cells or objects.

13

I V. Key Mouse Operat ions

♦ Move a Cell or Range

Select the cell or range you want to move. When selected, it should appear in reverse

video. Position the mouse pointer at the edge of the cell or range so it turns into an

arrow. Hold down the left-hand mouse button and drag the selection to its new

location. Release the mouse button. The cell or range is still selected. Click anywhere

out of the cell or range to de-select it.

♦ Copy Data

Similar to moving a cell or range. Select the cell or range you want to copy. Position

the mouse pointer at the edge of the cell or range so it turns into an arrow. Hold down

the CTRL key and hold down the left-hand mouse button. (Note the small plus sign

displays above the mouse arrow pointer as a visual reminder that this is a copy

operation, not just a move.) Drag the selection to create a copy in a new location.

Release the mouse button. Then click anywhere out of the cell or range to de-select it.

♦ Fill & Extend

This section describes two variations on copying: Filling and Extending. Both methods

start with a source cell or range to copy and copy to contiguous cells.

Filling repeats cell contents. The results are most like the copy operation. To copy by

filling:

1. - Select the source cell or range to

copy.

2. - Position the mouse pointer on

the fill box in the lower-right-hand

corner of the cell or range. The

The fill box

14

pointer should turn into a thin filled crosshair.

3. - Hold down the left-hand mouse button and drag to the right so the range

now extends to the next column (or columns).

15

4. - The contents of the source cell or range are repeated in the adjacent

location you indicated.

5. - Click any cell to deselect and turn off reverse video.

In this example, the fill box at the lower right corner of cell A3 was

dragged two columns to the right to extend the A3 entry.

Extending is similar to filling. It also starts with the source data but instead of copying

it extends the data in a logical progression. That is:

1. - Select the source cell or range to extend.

2. - Position the mouse pointer on the fill box in the lower-right-hand corner of

the cell or range. When positioned over the fill box the pointer will

display as a thin filled crosshair.

3. - Hold down the left-hand mouse button and drag to the right1 so the range

now extends to the next column (or columns).

The difference between filling and extending is that after you extend the source cell or

range the cells you’ve filled with data don't hold the same thing as the source cells.

They’re not just a copy because Excel extends the data in a logical fashion.

For example:

If the source cell(s) hold(s): The contiguous extended cells hold:

Qtr1 Qtr2, Qtr3, Qtr4, Qtr1, Qtr2, etc.

Jan Feb, Mar, Apr, May, Jun, Jul, etc.

1 You can also drag to the left or down, depending on what your source data looks like and what you want

to do.

16

1994, 1995 1996, 1997, 1998, 1999, 2000 etc.

In the third example in the table above we needed to give Excel at least two cells

worth of source data so it would know how to extend the data. A variety of

progressions are possible if you give Excel a sample of how you want it to proceed. For

example:

If the source cells hold: The contiguous extended cells hold:

2000, 1999 1998, 1997, 1996, 1995, 1994, etc.

.2, .4 .6, .8, 1.0, 1.2, 1.4, 1.6, etc.

V. Moving and Select ing

♦ Moving Around the Worksheet

Use the scroll bars at the right and bottom of the workbook window to move quickly

around the worksheet.

To go to a specific cell, hit the F5 key to get the Go To dialog box. In the Reference area,

enter the reference of the cell you want to go to and click OK. Excel closes the dialog

box and makes the cell you named the current cell.

In the Go To: area of the dialog box, Excel keeps track of the last locations you asked

for, in case you want to return to them.

If you've named cells or ranges in your worksheet you can enter a name instead of a

cell or range reference.

CTRL+Home puts you in the upper-left-hand corner of your worksheet: cell A1.

♦ Specifying a Range

You may need to specify a range by typing, and not just by selecting the range with

the mouse. This is especially useful, for example, if the range is a large one extending

17

past the borders of your display and so not easy to select by dragging. To specify a

range by typing, indicate the cell reference of the cell at the top left corner of the

range. Type a colon. Then indicate the cell at the bottom right corner of the range.

Here’s an example of typing in a range specification: A1:B5

You can also select a range by using the Go To dialog box (F5) and typing in a range

specification instead of just a single cell reference.

♦ Selecting a Range for Data Entry

If you need to enter a lot of data in contiguous cells of your worksheet you can speed

up operations by selecting the range where the data will be before you begin entering

data. Then when you enter data in the first cell of the range you can just hit the enter

key to move to the next cell instead of hitting the enter key and having to use an arrow

key or the mouse to move to the next cell. Within the range you specify, Excel by

default moves down each column and then across.

Change the default setting for your installation of Excel by clicking Tools, Options, Edit

and selecting an option from “Move Selection after Enter Direction” .

18

VI . Formulas

♦ Format

Select the cell where you want to enter a formula and type an equal sign to start the

formula (and activate the formula bar). Type the formula into the cell and hit the enter

key when you're finished. Use parentheses where necessary to make operations clear.

♦ Naming Cells & Ranges

You can assign any worksheet cell or range a name and then use that name in a

formula. This can make your worksheet more readable.

An easy way to assign a name is to select a cell or range and enter the name you want

to assign it in Excel’s “name box” on the formula bar.

The formula bar

How the formula

displays in the

worksheet itself.

The “name box”

on the formula

bar.

19

If you name cells or ranges after you’ve already used their values in formulas, you

need to explicitly tell Excel to use the names in the formulas. You can do this with the

command Insert, Name, Apply. Select the names you want to use from the Apply

Names dialog box that displays.

♦ Tips for Avoiding Errors

Naming key cells and using those names in formulas instead of cell references can help

you avoid errors. For example, the formula =Q55*M92 is probably less immediately

comprehensible than the formula =Subtotal*Taxrate.

When constructing a formula you can use the mouse to click a cell you want to

include in the formula instead of typing in the cell’s name or reference. Excel includes

the cell reference (or name, if available) in the formula automatically. Clicking the cell

you want to include can help you avoid typing in the wrong reference by mistake.

Keep formulas short and straightforward. If you need to express a complex

relationship with a formula it's better to build several short formulas and use them as

building blocks for intermediate values rather than to build one long, baroque, error-

prone, and hard-to-debug formula.

20

Excel displays an error value in a cell when the formula for that cell can't be

calculated. If a formula includes a reference to a cell that contains an error value, that

formula also produces an error value.

21

Examples of Excel error values:

#DIV/0! The formula is trying to divide by zero.

#N/A No value is available.

#NAME? Excel doesn't recognize a name used in the formula.

#NUM! There's a problem with a number in the formula.

#REF! The formula refers to an invalid cell.

#VALUE! An argument or operand is incorrect.

♦ Using Built-in Functions

Excel has a large library of built-in functions you can use to perform standard

worksheet calculations. In many cases you can use these functions instead of writing

your own formulas. Use the built-in functions by themselves or embed them within

your own formulas.

Functions can be nested within other functions.

All Excel functions have the same basic syntax: =function name(parameters).

If you don't already know the syntax of the function you need, use the

function button on the Standard toolbar to call up the Function Wizard

dialog box.

The Function Wizard dialog box walks you through selecting and completing a

function.

22

♦ Copying Formulas (Relative Referencing)

There will be many occasions when you build a worksheet model with several like

formulas. For example, perhaps your budget model totals sales in six departments for

each of the months of January to December. The formula to sum departmental sales

for January is the same as the formula to sum departmental sales for December, except

they refer to different columns of data. If your January to December columns are

structured alike, there's no reason to separately enter twelve summing formulas.

Instead, enter the formula for January and then copy it across the worksheet to the

other eleven columns.

Excel adjusts cell references in each copied formula across the row so that each

formula refers to its own column's data. That is, if the January sales data is in Column

A, the formula for January refers only to cells in Column A. February’s data is in

Column B. Even though the sum formula for February was copied from January’s

formula in Column A, the February formula correctly refers only to cells in Column B.

This formula copying and adjusting arrangement is the default in Excel. It’s termed

relative referencing. Keep in mind that it’s an issue only when you’re copying a

formula.

♦ Absolute Addressing

23

There may be times when you copy a formula that you don't want Excel to adjust a

cell reference in the copy from the master formula. That is, when you copy the

formula, you don't want the default of relative addressing for some or all of the copied

formula's cell references.

For any reference in the source formula that you want to “ fix” (e.g., disallow any

changes during the copy) use a dollar sign before the row and column indicator. The

dollar sign is an arbitrary symbol that just instructs Excel not to change the reference.

For example, a source formula that allows the D5 reference to change but fixes the

reference to A1 would look like this:

=D5*$A$1

If we copy the source formula above across the worksheet to columns E, F, and G, the

copied formulas in those columns would look like this:

=E5*$A$1

=F5*$A$1

=G5*$A$1

In this example, the formulas in E2, F2, and G2 were copied from the original formula

in D2. In the master formula in Cell D2, the reference to cell A1 was absolute (fixed)

but the reference to the value in Row 1 (D1) was relative.

As a result, when this formula was copied to E2, F2, and G2, each copied formula

referred to Cell A1 (the absolute reference value) and also to the value in Row 1 of its

own column (the relative reference value).

VI I . Chart ing

24

♦ Chart Basics

Some worksheet data is too complex to interpret at a glance. If this is true of your

data, and if you want to present the data in a different way, consider using an Excel

chart to show your data graphically. Excel has a variety of chart types to choose from,

from simple, general column, bar, and pie chart types to specialized types such as XY,

radar, bubble, stock, and surface charts. Excel’s online help for charts provides

excellent suggestions on what chart types are especially appropriate to display

particular data.

♦ Using the Chart Wizard

The easiest way to create an Excel chart is to

make use of Excel’s Chart Wizard. The Chart

Wizard is a button on Excel’s Standard Toolbar,

or invoke it with the menu commands Insert,

Chart.

Although not required, it’s customary to select

the data you want to chart before you open the

Chart Wizard. At least initially, all the data you

plan to chart must be located on the same

worksheet, although it need not be contiguous.

The illustration at right shows the first of the four Wizard steps. Select the type of

chart you want in this step.

The second Wizard step shows a thumbnail

view of your chart and confirms the range of

data you’re charting. If you selected the data to

chart before starting the Chart Wizard, the

“ Data range” box is automatically completed.

Otherwise, choose the data range to chart in

this step.

Also in this step you can choose to identify

your data series in rows or in columns. Excel

makes its best guess.

25

The “ Series” tab in Step 2 provides advanced methods for choosing and labeling data.

The third Chart Wizard step

provides lots of options for

formatting your chart. Most of

these options can be accessed and

changed later, once your chart is

built, by right-clicking and

choosing from the pop-up menu

that displays.

The final Wizard step lets you

choose a location: a new

worksheet that Excel inserts into

your workbook for you, or as a

graphical object that floats on the

surface of the current worksheet.

Once you’ve gone through the four Chart Wizard steps, you may want to move and

or size the chart. Click the chart to select it. Drag to move it. Drag the selection box at

a corner to resize it.

As mentioned earlier, remember that right-clicking any chart element provides

access to customization options for that element. In addition, the Charting

Toolbar that displays whenever a chart is selected also contains many of the

most commonly-used commands.

26

An Excel chart is dynamic, in the sense that it’s tied to the data on which it’s

based. If the underlying data values change, the chart changes automatically.

VI I I . File Managem ent Essent ials

♦ Saving a File

To save a workbook use the commands File, Save to get the dialog box that lets you

name your file and specify what drive and in what folder it should be saved.

The Save as type: entry at the bottom of the dialog box lets you translate your file into

other formats (123, text, DBase, etc.)

♦ Retrieving a File

27

To retrieve a workbook you've saved on disk use the commands File, Open. Excel

displays a dialog box similar to the one above where you can name the file to open

and specify where it’s located.

I X. Pr int ing

To print the current worksheet using Excel's defaults for printing click the Print button

on Excel's Standard toolbar.

To control Excel’s print options select File, Page Setup to open the Page Setup dialog

box. Note that this dialog has four tabs: Page, Margins, Header/Footer, and Sheet.

28

Some particularly useful options:

To specify an area to print

Go to the Sheet tab, click in the Print Area box and then drag through the worksheet

areas that you want to print. (Nonadjacent ranges print on separate sheets.)

To print row & column headings & gridlines

Go to the Sheet tab and click in the “row and column headings” and “gridlines” boxes

to put check marks in these boxes.

To print headers and footers

Click the Header/Footer tab and follow the prompts. Note that a number of standard

header entries (page, name, date, etc.) are provided.

To center the printout on the page

Click the Margins tab and check Center on page horizontally or Center on page vertically.

To select portrait or landscape orientation

Click the Page tab and select whether you want Excel to print down an 8 ½ x 11 page

or across.

To fit your printout on one (or x) page(s)

Click the Page tab and click the Fit to option in the “Scaling” section. If you have a

spreadsheet that’s just a row or column or two too large to fit nicely on a single page,

this is a lifesaver of an option. It reduces your entire spreadsheet in size just enough to

fit in the space you specify with the Fit to option.



APPENDIX 6 – THE FAIRY GODMOTHER AND THE MAGIC

TRAIN – NOEL WHITTAKER

The Fairy Godmother and the Magic Train

“Wishes, on their way to coming true, will not be rushed.”

ARNOLD LOBEL

It was a warm summer’s night and Margaret was propped up in a hospital bed, half asleep, musing

over the events of the day. It had been the biggest day in her short life of 22 years. That morning her

first child James had been born and she had that tired but contented feeling of a new mother as she

rested and thought about what kind of world James would face.

Suddenly she was startled by a glow in the room and looked up in fright to see a small figure,

dressed like a ballerina, coming in through the closed window. The window did not seem to impede

the strange little being who seemed to have no more substance than a beam of light.

“Who are you?” whispered Margaret slowly. She had never seen anything like it before but did not

feel frightened as the tiny body seemed so full of love, as well as being too small and light to harm

anybody. “I am the fairy godmother of all the babies,” was the reply. “I visit every new parent to tell

them about my magic train and how it can carry their child on a trip to riches beyond all

imagination.”

Margaret was not impressed. “The idea certainly sounds fine but I don’t see it happening. I wonder if

I will be like most people I know; forever trying to scrape enough money together to pay for the food

and the mortgage payments.” She was now fully awake, her initial shock had disappeared and

curiosity was slowly taking its place.

“I know,” replied the fairy. “You seldom see the results of my work because I have such an uphill

battle trying to convince people to come on the trip. I offer them all a ride on my train but so few

bother to accept the invitation. Most of them seem content for their children and their children’s

children to remain poor.”

Margaret was a sensible woman and by now her curiosity was thoroughly aroused. She asked if the

trip was free.

“Of course the trip is not free; everything worthwhile in life has a price, but in this case the price is

VERY small, if you join the train early enough. Why don’t you let me tell you how it works?” Naturally

Margaret did want to hear more and what she heard was destined to change the life of her family

for generations.

The fairy told her of a magical train that was given to every person, but made just one journey in

their lifetime. It started on this trip when the person was born and kept going until they died. It

made up to 100 stops and at every stop its tender was filled up with gold. Each time the gold filled

up the tender the train grew in size so that at the next station there was a bigger tender waiting for

the next load of gold to be poured in.

Margaret was intrigued by the cost of the trip for it had the strangest fare structure, just $1,000 a

year or $2.73 a day; furthermore, it was guaranteed never to increase provided you paid it every

year.

“That’s a cheap enough price,” she said. “Almost everybody I know can scrape up $2.73 a day. There

must be a catch.”

“No, there’s no catch, but there is another rule I haven’t told you about yet. It’s a weird one really.

The $2.73 a day only pays for the running costs of the train so you still have to pay for the train itself.

However, there is a special bonus – if you get on at the terminal, but only there, the train is given to

you. Remember this is a magic train, so every time the gold pours into its tender it gets bigger. We

can give you one for nothing when we start the journey because the train is so tiny that it’s almost

worthless. If you don’t board it then you have to buy the train, as well as pay the running costs.

Therefore it costs more to travel as you get on at stations along the way and the bigger the train gets

the more it costs.”

Margaret was sceptical, but was interested enough to discuss it with her husband Jack when he

came to visit next day. He was more sceptical than Margaret, but there was something about the

fairy that Margaret trusted, so after about an hour of discussion Jack said “Let’s give it a go. We have

$1,000 saved up so we’ll join the train with that.”

The good fairy returned the next night and Jack and Margaret handed over their $1,000. In return

they were given a tiny train – about half the size of a matchbox toy. “This thing will be pushing to

take James too far on the journey to riches,” snorted Jack, but Margaret calmed him down and they

settled into their new life as parents.

A year later the fairy godmother came around again with some exciting news. “Your train has just

pulled into the first station and they have dumped $140 in gold into its tender. It’s now 14% bigger.”

The train didn’t look much bigger and Jack was still suspicious of the whole concept, but they had

been dutifully putting their $2.73 each day away in a jar so they quietly handed over the second

thousand dollars.

Another year passed quickly. James was now a big healthy two year old and the good fairy called

with the latest news. “We have just got to Station Two and there is now $300 in gold pouring into

your train’s tender. That’s more than TWICE what you got last year and your train is now worth

$2,440. It’s now two and a half times bigger than when I gave it to you.” She was right. The train was

growing nearly as fast as James.

Three more years went by and it was James’s fifth birthday. They had continued putting away their

$2.73 a day and the good fairy called with some incredible news. “Your train just pulled into the fifth

station and they have dumped $926 of gold into it. That’s almost as much as you are putting into

your money box. The train is now more than seven times bigger than when you bought it. It is worth

$7,537.”

The once sceptical Jack was in raptures. “I have been talking to my mate Henry about this. He

thought it was a stupid idea at the start but now he wants to come on the journey too. Can he have

a train for his five year old daughter?”

“Of course he can,” laughed the fairy. “Everybody can have their own train BUT remember the rules I

told you about. The train is only free if you board at the terminal. Once it leaves there and starts the

journey you have to buy the train if you intend to pay only $2.73 a day for the running costs. If Henry

wants one for his daughter he will have to pay $7,537 for it, plus the $2.73 a day naturally.”

Henry was stunned when he heard this, but he wasn’t a fool. He had listened at first with scorn and

then with ever increasing interest as Jack had told him about James’ train, and now he was prepared

to make the effort and scrape up the $7,537 he needed for his daughter to join the journey.

Five more years passed and the good fairy had become great friends with the two families. She

called to give her yearly progress report, and to look at their children who were now bright ten year

olds and watching their trains progress with interest as well as growing excitement. “You are now at

Station 10. We have just tipped $2,707 of gold into your tender and your train is now worth $22,045.

It has now increased in size by 22 times since I gave it to you – it is fast becoming a huge powerful

locomotive. Wasn’t Henry wise to get on when he did? I doubt if any of your other friends will be

able to join it now; not many parents can find the $22,045 required to buy a train as big as this one

has become in just 10 years.”

And so the years rolled by, the train grew bigger and bigger and went faster and faster and in the

year James was 21 the gold tipped into the tender was $16,195, and the train was worth $131,876.

This was also the price to buy the train then for anybody who wanted to retain the cheap fare of

$2.73 a day.

At James’ 21st birthday a friend of James called him aside and whispered in his ear “I’ve heard the

strangest things about this magic train of yours. Is it too late for me to join?”

“Sure you can join but the problem is buying the train. Have you got $131,876?” was James’ reply.

“There’s not a hope of that but I do have a good income. Would you ask the good fairy if there is

anything at all she can do to help me?” James took pity on his friend and consulted the good fairy at

the first opportunity. He was rocked by what she told him. “Certainly he can join the journey, but if

he wants a free train we shall have to incorporate the cost of it in the fare. He will have to pay just

over $20,000 a year in fares if he wants to have the same size pot of gold as you will have when you

are 60.”

The mathematics of that didn’t make sense to James. He had paid $21,000 in the last 20 years and

had just $39,000 still to pay. His friend would pay $20,000 a year for the next 39 years just to keep

up with him. James’ total fares were $60,000 while his friend’s would be $780,000.

By this time the train was huge but seemed to be growing at such a pace that James could hardly

believe his eyes. He had kept up the habit of giving the fairy his $2.73 a day but it now seemed so

insignificant when compared to the vast shower of gold that poured into the tender each year. By

the time he was 31 the train was worth over HALF A MILLION DOLLARS after over $62,000 had been

added to its tender. “it is a strange train,” he observed. “More gold poured into that tender in that

31st year than went in during the whole of the first 16 years. I still can’t figure out the mathematics.”

On his 37th birthday he had another visit from his friend the good fairy. “it’s time for me to

congratulate you and tell you another secret that I never told your parents. The train has just had

nearly $140,000 placed in its tender and is now worth well over ONE MILLION DOLLARS. When you

reach this level you can stop paying the $2.73 a day – you now have a FREE ride for the rest of your

life!”

And so the journey went on and the train continued to grow. It reached SIX MILLION DOLLARS by

James’ 50th birthday, TWELVE MILLION DOLLARS by his 55th birthday and nearly TWENTY FOR

MILLION DOLLARS by his 60th birthday. At that stage he stopped work and lived on all the gold he

had accumulated as a result of paying just $2.73 a day for the first 37 years of this life.

The good fairy still visits new parents but nothing has changed. Hardly anybody takes any notice of

her. “What can you do with $2.73 a day?” is the usual question. In reply she just smiles and thinks of

James and his special train, and in her mind sees the name that has been painted on the engine –

The Magic of Compound Interest.

Important Note

The world is full of sceptics and many who read this will say the figures used are unreal, that tax will

take most of the earnings, or that the future value of the investment is made worthless by inflation.

The aim of this story is to show you the importance of starting an investment plan early, and to

understand how small sums can grow. I do NOT want it used as a tool for unscrupulous sales

people to use to encourage you to sign up for long term savings plans with huge hidden charges.

I suggest you put the $1,000 a year away in managed funds such as unit trusts run by leading fund

managers – probably growth units in split trusts with all earnings re-invested will achieve the best

return. You will learn more about these in the chapters on managed funds. Make sure you keep in

touch with your financial adviser as the plan may work better if the money is invested in the name of

a low or non-income earning spouse in the early stages.

When I wrote this chapter for the original edition of More Money in 1990, I used a return on

investment of 14% and an inflation rate of 7%. Since then inflation and returns have dropped but the

principles still hold true. The new types of managed funds such as split trusts that have the ability to

maximise growth at the expense of income (a kind of internal negative gearing) should be capable of

doing better than 14% if inflation Is 7%.

At an average inflation rate of 7% a year, $24 million dollars in 60 years’ time is worth over $414,000

in today’s money which cannot be regarded as “worth little”, particularly for a total investment of

$37,000. Under present laws little capital gains tax would be incurred if a progressive realisation of

the investment commenced at age 60.

The chart below illustrates the principle and is based on the figures used in the example. Obviously

future earnings can never be guaranteed, but I will guarantee that anybody who practises this

strategy over the long term will finish up with a lot of money.

Few people will make the effort to try it out yet the truth is that it DOES work and costs only $2.73 a

day. Why not give it a go?

Station

NO. GROWTH

VALUE OF

TRAIN

STATION

NO. GROWTH VALUE OF TRAIN

1 140 1 140 31 62 747 510 937

2 300 2 440 32 71 671 583 608

3 482 3 922 33 81 845 666 453

4 689 5 611 34 93 443 760 896

5 926 7 537 35 106 665 868 561

6 1 195 9 732 36 121 739 991 299

7 1 502 12 233 37 138 921 1 130 221

8 1 853 15 086 38 158 231 1 288 452

9 2 252 18 338 39 180 383 1 468 385

10 2 707 22 045 40 205 637 1 674 472

11 3 226 26 271 41 234 426 1 908 898

12 3 818 31 089 42 267 245 2 176 143

13 4 493 36 528 43 304 660 2 480 804

14 5 261 42 843 44 347 312 2 828 116

15 6 138 49 981 45 395 936 3 224 052

16 7 137 65 255 46 451 367 3 675 420

17 9 276 75 530 47 514 558 4 189 979

18 10 714 87 244 48 586 597 4 776 576

19 12 354 99 598 49 668 720 5 445 296

20 14 083 114 681 50 762 341 6 207 638

21 16 195 131 876 51 869 069 7 076 707

22 18 602 151 478 52 990 738 8 067 445

23 21 347 173 825 53 1 129 442 9 196 887

24 24 476 199 301 54 1 287 564 10 484 451

25 28 042 228 343 55 1 467 823 11 952 274

26 32 108 261 451 56 1 672 318 13 625 592

27 36 743 299 194 57 1 907 528 15 533 174

28 42 027 342 221 58 2 174 644 17 707 818

29 48 051 391 272 59 2 479 094 20 186 912

30 54 918 447 190 60 2 826 167 23 013 079

dfp module 2 appendix

Documents