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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?
Expert Solution
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.
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