You sit on the board of directors of a local nonprofit corporation. At its last meeting, the board decided to begin to fund a very modest retirement pension for the organizations custodian. The details of the plan are as followed:
1 ) The custodian is thirty-nine years old: the plan will begin to make annual payments to him twenty six years from the date when the funding for the plan begins. You assume the custodian will continue his employment with the corporation.
2 ) When payments begin, the custodian will receive a single cash payment each year for fifteen years. The first payment will be $5,000, and each succeeding payment will increase by 4 percent. Payments stop after the fifteenth payment.
3 ) Money paid into the fund collects interest at a constant 8 percent annual rate, and there is no tax liability on the account.
4 ) The annual contributions that the corporation makes to the fund will also increase at 4 percent rate and will also earn 8 percent interest until withdrawn.
As the chair of the personnel committee, you are responsible for determining the initial amount to fund this retirement stipend. If your figures are correct, all succeeding annual budget amounts will simply be increased 4 percent from the previous year’s budget. How much do you need to deposit now to get the plan in motion?