Funding Jill Moran’s Retirement Annuity
Case Study 1
Funding Jill Moran’s Retirement Annuity
Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran, by contract, will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 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,” Sunrise wishes to the fund the annuity by making equal, annual, end-of-year deposits into an account earning 9% interest. Once the 20-year “distribution period” begins, Sunrise plans to move the accumulated monies into an account earning a guaranteed 12% per year. At the end of the distribution period, the account balance will equal zero. Not thate the first deposit will be made at the end of year 1 and that the first distribution payment will be received at the end of year 13.
A. Draw a time line depicting all of the cash flows associated with Sunrise’s view of the retirement annuity. t=0 | | | | t=12 | | - | t=32 | | | | | | | | | | | | | | | | | | | | P1 | P2 | | P12 | A1 | A2 | | A20 |
There will be 12 funding, shown as P1 to P12 and then there will be 20 payments, shown as A1 to A20 B. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?
PV for an annuity to be paid for 20 years:
Annuity amount: 42,000 p/yr
Period: 20 years
Rate: 12%
PV of annuity: $ 313,716.63 dollars should be accumulated.
C. How large must Sunrise’s equal, annual, end-of-year deposits into the account be over the 12-year accumulation period to fund fully Ms. Moran’s retirement annuity?
Payment
FV: 31,716.63
Period: 12 years
Rate: 9%
Annual deposit needed to be deposited by Sunrise is $15,576.24 per year D. How much would Sunrise have to deposit annually during the accumulation
Funding Jill Moran’s Retirement Annuity
Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran, by contract, will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 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,” Sunrise wishes to the fund the annuity by making equal, annual, end-of-year deposits into an account earning 9% interest. Once the 20-year “distribution period” begins, Sunrise plans to move the accumulated monies into an account earning a guaranteed 12% per year. At the end of the distribution period, the account balance will equal zero. Not thate the first deposit will be made at the end of year 1 and that the first distribution payment will be received at the end of year 13.
A. Draw a time line depicting all of the cash flows associated with Sunrise’s view of the retirement annuity. t=0 | | | | t=12 | | - | t=32 | | | | | | | | | | | | | | | | | | | | P1 | P2 | | P12 | A1 | A2 | | A20 |
There will be 12 funding, shown as P1 to P12 and then there will be 20 payments, shown as A1 to A20 B. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?
PV for an annuity to be paid for 20 years:
Annuity amount: 42,000 p/yr
Period: 20 years
Rate: 12%
PV of annuity: $ 313,716.63 dollars should be accumulated.
C. How large must Sunrise’s equal, annual, end-of-year deposits into the account be over the 12-year accumulation period to fund fully Ms. Moran’s retirement annuity?
Payment
FV: 31,716.63
Period: 12 years
Rate: 9%
Annual deposit needed to be deposited by Sunrise is $15,576.24 per year D. How much would Sunrise have to deposit annually during the accumulation