You have been hired to run a pension fund for TelDet Inc, a small manufacturing

Question

You have been hired to run a pension fund for TelDet Inc, a small manufacturing firm. The firm currently has $5 million in the fund and expects to have cash inflows of $2 million a year for the first 5 years followed by cash outflows of $ 3 million a year for the next 5 years. Assume that interest rates are at 8%.

a. How much money will be left in the fund at the end of the tenth year?

b. If you were required to pay a perpetuity after the tenth year (starting in year 11 and going through infinity) out of the balance left in the pension fund, how much could you afford to pay?

Explanation / Answer

a) Putting it in a financial calculator you get $4,833.31 (The calculation, which presumably no one wants to do by hand, is 5,000+2,000/1.08+2,000/1.08^2+........-2000/1.08^10). b) 4833.31*.08= $386.66

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