Question
In: Finance
On January 1, 2018, the Stridewell Wholesale Shoe Company hired Sammy Sossa. Sammy is expected to...
On January 1, 2018, the Stridewell Wholesale Shoe Company hired Sammy Sossa. Sammy is expected to work for 25 years before retirement on December 31, 2042. Annual retirement payments will be paid at the end of each year during his retire ment period, expected to be 20 years. The first payment will be on December 31, 2043 . During 2018 Sammy earned an annual retirement benefit estimated to be $2,500 per year. The company plans to contribute cash to a pension fund that will accumulate to an amount suffic ient to pay Sammy this benefit. Assuming that Stri dewell anticipates earning 6% on all funds invested in the pension plan, how much would the company have to contribute in 2018 to pay for pension benefits earned in 2018?
Solutions
Expert Solution
| Amount of retirement payment | $2,500 | |||||||
| Number of years of payment | 20 | |||||||
| Interest rate | 6% | |||||||
| Amount required at the time of retirement | $28,675 | (Using PV function of excel with rate=6%,Nper=20,Pmt=2500 | ||||||
| Number of years to retire | 25 | |||||||
| Present Value (PV) of cash flow=(Cash flow)/((1+i)^N) | ||||||||
| i=interest rate=6%=0.06 | ||||||||
| N=Year of cash flow=25 | ||||||||
| Cash to be contributed at present (PV)=28675/((1+0.06)^25) | ||||||||
| Cash to be contributed in pension fund= | $ 6,681 | |||||||
 |
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