Question
Mr. Baggio runs a pension fund for a small manufacturing firm. The firm currently has $19 million in the fund and expects to receive cash
Mr. Baggio runs a pension fund for a small manufacturing firm. The firm currently has $19 million in the fund and expects to receive cash inflow contributions in the form of a 5-year ordinary that starts at $4.0 million but grows at a 6 percent annual rate. After five years, the fund must pay a 5-year ordinary annuity benefit that begins at 3.0 million but grows at a 5 percent annual rate. Assume that interest rates are at 8%.
Part A: How much money will be left in the fund at the end of the tenth year?
Part B: If Mr. Baggio were required to pay a perpetuity after the tenth year (starting in year 11) out of the balance left in the pension fund, how much could he affords to pay per year? Explain your approach in a few lines.
ALL WORK MUST BE SHOWN AND EXPLAINED!
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