Question

Kit Fox is the finance manager at Builtrite and she just noticed that one employee-Terry Dactel-has a guaranteed 25 year pension annuity which will pay him $42,000 annually for 25 years. Terry will be retiring in 15 years. Kit also noticed that no funds have been set aside for Terry's retirement. Once the employee retires, the retirement pension account typically earns 4% annually and company deposits into the fund (before the employee retires) are invested in mutual funds which have been earning 9% annually. How much will Kit Fox need to deposit each year in order to fund Terry Dactel's retirement? $20,161 $22,346 $24,411 $28,671

Answer 1

$22,346

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

$42,000.00 Annual Payment during retirement No. of annual payment Annual interest rate (in retirment) 25 4% Value of Annual payment on retirement date $656,127.36 15 Years to retire Annual interest rate before retirement Annual deposit 9% $22,346

Cell reference -

B Annual Payment during retirement No. of annual payment Annual interest rate (in retirment) 42000 25 0.04 Value of Annual payment on retirement date =PV(C4,C3,-C2,,0) Years to retire Annual interest rate before retirement Annual deposit 15 0.09 =ROUNDDOWN(PMT(C9,C8,,-C6,0),0) | 11 12

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.