CNT Industries wishes to accumulate funds to provide a retirement annuity for its vice-president of research, Jennifer
Question:
CNT Industries wishes to accumulate funds to provide a retirement annuity for its vice-president of research, Jennifer Mangan. Ms. Mangan will retire in exactly 12 years’ time. Upon retirement, she is entitled to receive an annual end-of-year payment of $52,000 for 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12-year “accumulation period,” CNT wishes to fund the annuity by making equal annual end-of-year deposits into an account earning a return of 9.64 percent compounded quarterly. Once the 20-year “retirement period” begins, CNT plans to move the accumulated monies into a safer investment account that is expected to earn 7 percent per year. At the end of the 20-year retirement period, the account balance will equal zero. Note that the first deposit will be made at the end of year 1 and the first distribution payment will be received at the end of year 13.
How much would CNT have to invest annually during the accumulation period if Ms. Mangan’s retirement annuity was a perpetuity and all other terms were the same as initially described?
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter