You are the CFO of the firm Ponce de Leon Foods. The board has decided to...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are the CFO of the firm Ponce de Leon Foods. The board has decided to offer an early retirement plan whereby the typical 55-year-old worker can retire now with a small cash severance and draw a pension of $10,000 a year, expected to last for 30 years (the first payment would be made one year from now). You plan to set aside sufficient money now to fund the plan and have secured guarantees from your insurance company promising you an 8% annual return on all funds deposited by you, to meet these projected payments based on the terms above, and to bear any risk (such as interest-rate surprises or greater-than-expected lifespans). You expect 100 workers to take advantage of the plan, so you must fund expected pension payouts of $1 million a year for 30 years. The Amalgamated Paper-or-Plastic Workers have objected to the plan, since the pension payments "lose purchasing power" over time due to inflation. They propose an alternative plan of an $8,000 pension (also beginning in a year) that grows each year at a fixed rate of 5%. They claim that this plan should be attractive to the company, since it needs to pay less money to pensioners ($8,000 vs. $10,000) during today's difficult economic times. How much will it cost you for an up-front payment to fund each plan? You are the CFO of the firm Ponce de Leon Foods. The board has decided to offer an early retirement plan whereby the typical 55-year-old worker can retire now with a small cash severance and draw a pension of $10,000 a year, expected to last for 30 years (the first payment would be made one year from now). You plan to set aside sufficient money now to fund the plan and have secured guarantees from your insurance company promising you an 8% annual return on all funds deposited by you, to meet these projected payments based on the terms above, and to bear any risk (such as interest-rate surprises or greater-than-expected lifespans). You expect 100 workers to take advantage of the plan, so you must fund expected pension payouts of $1 million a year for 30 years. The Amalgamated Paper-or-Plastic Workers have objected to the plan, since the pension payments "lose purchasing power" over time due to inflation. They propose an alternative plan of an $8,000 pension (also beginning in a year) that grows each year at a fixed rate of 5%. They claim that this plan should be attractive to the company, since it needs to pay less money to pensioners ($8,000 vs. $10,000) during today's difficult economic times. How much will it cost you for an up-front payment to fund each plan?
Expert Answer:
Answer rating: 100% (QA)
To determine the upfront payment for each plan we can use the present value formula for an annuity F... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
5) Pablo Escobar has recently opened a slipper sandal Shop in Brisbane, Australia, a store that specializes in fashionable sleeper sandals. Pablo has just received a degree in business and he is...
-
Complete the following: Examine the concept of the exchange rate between the Japanese yen and the U.S. dollar. Choose a Japanese company, such as Toyota, Canon, or Mitsubishi, and identify a strategy...
-
Spartan Cabinets is thinking of offering a new line of cabinets. The project activities are as follows: a. Identify all the paths through the network and their lengths. Which activities start one or...
-
The probability that the noise level of a wide-band amplifier will exceed \(2 \mathrm{~dB}\) is 0.05. Use Table 1 or software to find the probabilities that among 12 such amplifiers the noise level...
-
Evan Nathan runs a home repair business. Recently he gathered the following cost information about the repair of a clients pool deck: replacement wood, $650; deck screws and supplies, $112; and...
-
EM4.2 Expense Credit Card Required: Complete the following to record Internet services that Mookie The Beagle Concierge incurred. 1. Create an Expense paid with Credit Card. a. Select (+) New icon >...
-
On January 30 of the current year, Ashton Corporation purchased from Cathy 10% of Todd Corporation stock for $250,000 in cash. On May 30 of the following year, Andrea and Bill each exchange one-half...
-
Yun has just finished high school. He has three periods of time left in his working life, and is considering three career options: 1) Obtain a job in a hotel, earning $20,000 for each of the...
-
Prove that if \(X, Y\) are two semi-martingales such that their stochastic logarithms are well defined, then \[\mathcal{L}(X Y)=\mathcal{L}(X)+\mathcal{L}(Y)+[\mathcal{L}(X), \mathcal{L}(Y)]\]
-
Let \(\left(N^{i}, i=1,2 ight)\) be two independent Poisson processes. Prove that \(N=N^{1}+N^{2}\) is a Poisson process. Compute the compensator of \(N\). Let \(\tau^{i}=\inf \left\{t: N_{t}^{i}=1...
-
A block with a mass of 0.28 kg is attached to a horizontal spring. The block is pulled back from its equilibrium position until the spring exerts a force of 1.0 N on the block. When the block is...
-
Prove that, for any \(\beta>-1\), any bounded Borel function \(h\), and any bounded Borel function \(\varphi\) valued in \(]-1, \infty[\), the processes \[\begin{aligned} & \exp \left[\ln (1+\beta)...
-
Let \(N\) be an inhomogeneous Poisson process with intensity \(\lambda(t), M\) its compensated martingale, \(W\) a Brownian motion and \[d X_{t}=h_{t} d t+f_{t} d W_{t}+g_{t} d M_{t},\] where \(f,...
-
John is a sales executive with Supercharged Electric Cars Inc., a startup car company dedicated to building affordable electric sports cars. After years of development, the company is ready to start...
-
Vince, Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device? I. Quality of...
-
Interview some employees of an organization, and ask them about the organizations values and norms, the typical characteristics of employees, and the organizations ethical values and socialization...
-
Go to a local store, restaurant, or supermarket, and list the ways in which you think the organization is being responsive or unresponsive to the needs of customers. How could this businesss...
-
Interview a manager in a local organization to determine the kinds of conflicts that occur in that managers organization and the strategies that are used to manage them.
-
Match the terms in the first column with an appropriate definition from the second column. Terms (a) Breakeven analysis (b) Sensitivity analysis (c) Risk analysis Definitions (1) Determining how the...
-
Cecils Manufacturing is considering producing a new product. The sales price would be \($10.25\) per unit. The cost of the equipment is \($100,000.\) Operating and maintenance (O&M) costs are...
-
The Fence Company is setting up a new production line to create top rails. The relevant data for two alternatives are shown below. a. Based on MARR of 8 percent, determine the annual rate of...
Study smarter with the SolutionInn App