Question

Three employees of the Horizon Distributing Company will receive annual pension payments from the company when they retire. The employees will receive their annual payments for as long as they live. Life expectancy for each employee is 15 years beyond retirement. Their names, the amount of their annual pension payments, and the date they will receive their first payment are shown below:

Employee	Annual Payment			Date of First Payment
Tinkers	$	37,000			12/31/24
Evers		42,000			12/31/25
Chance		47,000			12/31/26

Required:
1. Compute the present value of the pension obligation to these three employees as of December 31, 2021. Assume a 12% interest rate.
2. The company wants to have enough cash invested at December 31, 2024, to provide for all three employees. To accumulate enough cash, they will make three equal annual contributions to a fund that will earn 12% interest compounded annually. The first contribution will be made on December 31, 2021. Compute the amount of this required annual contribution.

Answer 1

Horizon Distributing Company Requirement 1 PV Employee Thinker Evers Chance $37,000*PVAD12%, 15*PV12%, 3 = $37,000*7.62816*0.71178 = $200,894 $42,000*PVAD12%, 15*PV12%, 4 = $42,000*7.62816*0.63551 = $203,606 $47,000*PVAD12%, 15*PV12%, 5 = $47,000*7.62816*0.56742 = $203,433 Requirement 2 Value of the pension obligation to the employees as of December 31, 2021: Employee Thinker $37,000*PVAD12%, 15 = $37,000*7.62816 = $282,242 Evers $42,000*PVAD12%, 15*PV12%, 1 = $42,000*7.62816*0.89285 $286,054 Chance $47,000*PVAD12%, 15*PV12%, 2 = $47,000*7.62816*0.79719 $285,811 $854,107 Amount of annual contribution = $533,757 / FVAD12%, 3 = $533,757/ 3.60477 = $148,069