A pension plan has promised to pay out $25 million per year over the next 15 years to its employees. Actuaries estimate the rate of return on the fund's assets will be 5.50%. What amount of pension fund reserves (to the nearest dollar) are needed for the plan to be fully funded?

Question

Quizplus · Accepted Answer

The correct answer can be found by using the Present Value of an Annuity formula: PV = PMT x [((1 - (1 + r)^-n) / r)] where PV is the present value, PMT is the annual payment, r is the rate of return, and n is the number of years. Plugging in the given values, we get: PV = $25,000,000 x [((1 - (1 + 0.055)^-15) / 0.055)] = $250,939,524. Therefore, the amount of pension fund reserves needed for the plan to be fully funded is $250,939,524, which is Choice C.

A Pension Plan Has Promised to Pay Out $25 Million