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Homework answers / question archive / Perpetuity Calculations You have been hired to run a pension fund for TelDet Inc, a small manufacturing firm
Perpetuity Calculations
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 five years followed by cash outflows of $3 million a year for the next five 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?
a) 5*(1+8%)^10 +2*(1+8%)^9+2*(1+8%)^8+2*(1+8%)^7+2*(1+8%)^6+2*(1+8%)^5-3*(1+8%)^4-3*(1+8%)^3-3*(1+8%)^2-3*(1+8%)^1-3*(1+8%)^0=10.43474512 million
The other way to calculate is
=5*FVIF(8%,10years)+2*FPIVA(8%,5years)*FVIF(8%,5years)-3*FVIFA(8%,5 years)
Look at the values from table, we have
=5*2.159+2*5.87*1.469-3*5.87=10.43 million
b) balance amount * interest rate
=10.43*8%=0.8344848 millions.
