5. (a) You belong to an unusual pension plan because your retirement payments wi

Question

5. (a) You belong to an unusual pension plan because your retirement payments will continue forever (and will go to your descendants after you die). If you will receive $48,000 per year at the end of each year starting 30 years from now (i.e., the first payment is in time 30), what is the present value of your retirement plan if the discount rate is 4.5%?

(b) How does your answer change if you receive $4,000 per month every month forever (in perpetuity) starting 30 years from today (in monthly time period 360) and you compound monthly?

Explanation / Answer

Present Value at end of 30 Years = 48,000/4.5% = 1,066,666.67 PVF for 30 Years@4.5% = .2670 Present Value Today =.2670 * 1,066,666.67 = 284,800 Yearly Rate 4.50% Monthly Rate(4.5%/12) 0.375% Monthly Pension                                                                     4,000.00 Present Value at end of 30 Years = 4,000/.375% = 1,066,666.67 PVF for 30 Years@.00375% = .2599 Present Value Today =.2599* 1,066,666.67 = 277,226.67

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