Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
You have been hired to run a pension fund for a small manufacturing firm
You have been hired to run a pension fund for a small manufacturing firm. The firm currently has P5,000,000 in the fund and expects to have cash inflows of P2,000,000 a year for the first 5 years followed by cash outflows of P3,000,000 a year for the next 5 years. Assume that interest rates are 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?
Expert Solution
PV = FV/(1+r)^n
here,
PV - Present value
FV - Future value
r - Interest rate
n - no. of periods
Put the values in the formula;
PV = 5*(1+0.08)^10 + 2*(1+0.08)^9 + 2*(1+0.08)^8 + 2*(1+0.08)^7 + 2*(1+0.08)^6 + 2*(1+0.08)^5 - 3*(1+0.08)^4 -3*(1+0.08)^3 - 3*(1+0.08)^2 - 3*(1+0.08)^1 - 3*(1+0.08)^0
= 10,434,745.12
ii.
Present value of perpetuity is given by = Cash flow/Rate
10,434,745.12 = Cash flow / 0.08
Cash flow = $834,779.61
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
