Question

A pension fund for a local government’s employees currently makes payouts to beneficiaries of $2,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year forever. Compute how much money the pension fund currently needs to have now in order to fully fund that liability (and ensure those payouts to pensioners are made) if it believes it can earn 7.94% per year on its investments. (U=10)

Name: a pension fund for a local governments employees currently makes payouts to beneficiaries of 2000000 per year with those payouts expected to grow with a forecasted inflation rate of 2 per ye 63297
Uploaded: 2023-12-11T17:50:46-08:00
Duration: 2 min 29 s
Channel: Akash M
Description: a pension fund for a local governments employees currently makes payouts to beneficiaries of 2000000 per year with those payouts expected to grow with a forecasted inflation rate of 2 per ye 63297

          A pension fund for a local government’s employees currently makes payouts to beneficiaries of $2,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year forever. Compute how much money the pension fund currently needs to have now in order to fully fund that liability (and ensure those payouts to pensioners are made) if it believes it can earn 7.94% per year on its investments. (U=10)

Added by Allison S.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Akash M

12/11/2023

Step 1

Step 1: Calculate the present value of the perpetuity of payouts using the formula: PV = P / (r - g) Where: PV = Present Value P = Annual payout amount = $2,000,000 Show more…

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A pension fund for a local government’s employees currently makes payouts to beneficiaries of $2,000,000 per year, with those payouts expected to grow with a forecasted inflation rate of 2% per year forever. Compute how much money the pension fund currently needs to have now in order to fully fund that liability (and ensure those payouts to pensioners are made) if it believes it can earn 7.94% per year on its investments. (U=10)