Deferred annuities; pension obligation
Three employees of the Horizon Distributing Company will receive annual pension payments from the company when they retire. The employees will receive their annual payments for as long as they live. Life expectancy for each employee is 15 years beyond retirement. Their names, the amount of their annual pension payments, and the date they will receive their first payment are shown below:
Employee Annual Payment Date of First Payment
Tinkers $20,000 12/31/19
Evers 25,000 12/31/20
Chance 30,000 12/31/21
Required:
1. Compute the present value of the pension obligation to these three employees as of December 31, 2016. Assume an 11% interest rate.
2. The company wants to have enough cash invested at December 31, 2019, to provide for all three employees. To accumulate enough cash, they will make three equal annual contributions to a fund that will earn 11% interest compounded annually. The first contribution will be made on December 31, 2016. Compute the amount of this required annual contribution.