Problem:
You have been hired as a pension fund manager for TeleRed Corporation, a small manufacturing firm. The corporation currently has $5 million in the fund and expects to have cash inflows of $2 million a year for the first five years followed by cash outflows of $3 million a year for the next five years. Assume that interest rates are at 8%.
Required:
Question 1: How much money will be left in the fund at the end of the tenth year? (How would you figure this out/plug it into a financial calculator).
Question 2: If you were required to pay perpetuity after the tenth year out of the balance left in the pension fund, how much could you afford to pay?
Note: Show supporting computations in good form.