You are the pension fund manager for Tanju's Toffees. Your CFO wants to know the minimum annual return required on the pension fund in order to make all required payments over the next five years and not diminish the existing asset base. The fund currently has assets of $500 million.
a. Determine the required return if outflows are expected to exceed inflows by $50 million per year.
b. Determine the required return with the following fund cash flows.
|
End of Year
|
Inflows
|
Outflows
|
|
1
|
$55,000,000
|
$100,000,000
|
|
2
|
60,000,000
|
110,000,000
|
|
3
|
60,000,000
|
120,000,000
|
|
4
|
60,000,000
|
135,000,000
|
|
5
|
64,000,000
|
145,000,000
|
c. Consider the cash flows in part (b). What will happen to your asset base if you earn 10 percent? 20 percent?