question archive beneficiaries of $4,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year for 30 years
beneficiaries of $4,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year for 30 years
Subject:FinancePrice:2.86 Bought3
beneficiaries of $4,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year for 30 years. Compute how much money the pension fund currently needs to have now in order to fully fund that liability if interest rates are 2.87% (and ensure those payouts to pensioners are made)
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Solution:
In the given case,we need to calculate the present value of growing annuity.Calculation is as follow:
Present value=[First payment/(Rate per period-growth rate)]*[1-(1+growth rate/1+rate per period)^no.of period]
=[$4000,000/(0.0287-0.02)]*[1-(1+0.02)/1+0.0287)^30]
=$103,414,425.86
thus pension fund currently need $103,414,425.86
