Question

Cola Corp. has agreed to fund a pension program for its employees. It will need to have a fund balance of $2.5 million in 20 years. The company has $500,000 to invest right away and does so at 5% compounded annually. It will make additional contributions monthly in arrears for the next twenty years. How much does each monthly contribution need to be if money is assumed to earn 4% over the next twenty years?

	A.	$3,786
	B.	$2,855
	C.	$3,199
	D.	$3,617
	E.	$2,782

Answer 1

Future value of the initial investment = PV * (1 + r)^n

FV = 500,000 * (1 + 0.05)^20

FV = $1,326,648.8525722101

Balance amount = 2,500,000 - 1,326,648.8525722101

Balance amount = $1,173,351.1474277899

With this as the future value, let's find the monthly contribution required

n = 20 * 12 = 240

r = 4%/12 = 0.003333333333

Option C is correct: $3,199