Question

Your company has made the following promises to a group of employees who are retiring today: a cash flow of $300 1 year from today, a cash flow of $500 2 years from today, a cash flow of $600 3 years from today? Assume all investments earn an annual interest rate of 15%, compounded annually. (The discount rate is 15%). The company has set aside $1100 to meet those obligations. Is the retirement fund under-funded or over-funded?

a.   under-funded
b.   over-funded

How much should they set aside?

  
Show that your company can pay $300, $500 and $600 I the future.

PLEASE SHOW ALL WORK

Answer 1

Amount to be set aside = PV of CFs required in future.

PV of CFs:

Year	CF	PVF @15%	Disc CF
1	$        300.00	0.8696	$        260.87
2	$        500.00	0.7561	$        378.07
3	$        600.00	0.6575	$        394.51
PV of Cfs	$    1,033.45

Amount set aside is $ 1100 and Amount required is $ 1033.45. Hence It over funded.

Overfunded by $ 66.55 [ 1100 - 1033.45 ]

Pls do rate, if the answer is correct and comment, if any further assistance is required.