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A business has agreed to fund a pension program for its employees. It will need to...

A business has agreed to fund a pension program for its employees. It will need to have a fund balance of $4.5 million in 10 years. The company has $1,000,000 to invest right away and does so at 2% compounded quarterly. It will make additional contributions monthly in arrears for the next 10 years. How much does each monthly contribution need to be if money is assumed to earn 1.2% over the next 10 years?

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Solutions

Expert Solution


Firm already has (Present value) $1,000,000 and target amount or FV $4,500,000

Hence, Future value $4,500,000 minus FV of $1,000,000 will be the required target amount.

Effective rate for 2% quarterly compounded = (1+2%/4)^4-1 = 2.015050%

Using financial calculator BA II Plus - Input details:

#

I/Y = Rate = Effective rate =

2.015050

PMT = Payment or Coupon or Regular payments / Frequency =

$0.00

N = Total number of periods = Number of years x frequency =

10

PV = Present Value =

-$1,000,000.00

CPT > FV = Future Value =

     1,220,794.24

.

Net FV required = 4,500,000 - 1,220,794.24 = $3,279,205.76

Now, we can calculate the monthly payment required   

Using financial calculator BA II Plus - Input details:

#

FV = Future Value = Net FV required =

-$3,279,205.76

PV = Present Value =

$0.00

I/Y = Rate / Frequency = 1.2/12 =

0.10

N = Number of payments = 10 x 12 =

120

CPT > PMT = Payment = Monthly payment =

$25,733.54

jeff jeffy answered 2 years ago
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