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5 . You are the CFO of the firm Ponce deLeon Foods. The board has decided to offer an early retirement plan whereby the typical
You are the CFO of the firm Ponce deLeon Foods. The board has decided to offer an early retirement plan whereby the typical yearold worker can retire now with a small cash severance and draw a pension of $ a year, expected to last for years the first payment would be made one year from now You plan to set aside sufficient money now to fund the plan and have secured guarantees from your insurance company promising you an annual return on all funds deposited by you, to meet these projected payments based on the terms above, and to bear any risk such as interestrate surprises or greaterthanexpectedlifespans You expect workers to take advantage of the plan, so you must fund expected pension payouts of $ million a year for years.The Amalgamated PaperorPlastic Workers have objected to the plan, since the pension payments "lose purchasing power" over time due to inflation. They propose an alternative plan of an $ pension also beginning in a year that grows each year at a fixed rate of They claim that this plan should be attractive to the company, since it needs to pay less money to pensioners $ vs $ during today's difficult economic times.How much will it cost you for an upfront payment to fund each plan?HINT: While vou could easily solve this on a spreadsheet. you may instead choose to use the formula below for the present value V of an initial endofvear annuity pavout of SC growing at q per period, with an interest rate of r for T periods
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