Corporate Finance Sunrise Industries How

Corporate Finance

Sunrise Industries

How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?

Sunrise Industries is obligated to pay a retirement annuity to their vice president of research after 12 years of employment. The end-of-year payment is to be in the annuitized amount of $42,000 per year and the interest to accrue on the end-of-year deposits is to be 9%.

The total payment amount paid over the 20-year period is equal to 20 multiplied by the $42,000 yearly annuity payment. The amount of $840,000 will be paid out to the vice president of research in aggregate over the 20-year period. In order to find the amount needed by the end of the 12-year period, the discount rate of 9% has to be applied to the total payment amount to determine the Net Present Value or NPV of the annuity. Therefore, Sunrise Industries must accumulate $840,000 over the 12-year accumulation period to fully fund the vice president of research, Ms. Moran's retirement annuity.

b. How large must Sunrise Industry equal, annual, end-of-year deposits into the account be over the 12-year accumulation period to fund fully Ms. Moran's retirement annuity?

Given that Sunrise Industry must pay out the $42,000 annuity over the 20-year period that will equal a total of $840,000, the method of finding the equal, annual amount necessary over the 12-year period is to divide the aggregate payout by the time to maturity of the annuity stream. When we determine the yearly and equal payment amount, the amount equates to $42,000 per annum. Although the required amount necessary to fund the annuity is $42,000, the annuity is earning 9% per annum and therefore $3,780 per annum. Therefore, the actual amount considering the first year payment is $38,220 per annum.

c. How much would Sunrise have to deposit annually during the accumulation period if it could earn 10% rather than 9% during the accumulation period?

If Sunrise is earning an additional 1% annually to equal 10% rather the current 9% that the account is earning, the difference is rather marginal, with the impact being less than $100.00 per year. However in finance, even the most marginal amount make an impact on the budget and this is not to be any different.

Considering that $38,220 would have to be deposited into the account at 9% per annum, the obvious notion is that a slightly smaller amount will have to be deposited into the account if the principle is now going to earn 10% per annum. Considering the 10% rate of return, the annual deposit amount is equal to $37,800. $4,200 will be accrued as interest at year's end, providing an aggregate of $42,000 per annum.

d. How much would Sunrise have to deposit annually during the accumulation period if Ms. Moran's retirement annuity were a perpetuity and all other terms were the same as initially described?

If Sunrise had to denominate deposits per annum on the premise that Ms. Moran's retirement annuity would be in perpetuity, with all other terms as equal (Ceteris Paribus), this is to mean that there is not a 20-year period till maturity. Additionally, as there is not a 20-year distribution period, the company will move the funds over to another interest bearing account at 12% yet not expect to have an account balance of $0 at the end of the term.

Generally speaking, actuaries will claim that a perpetuity will be planned for the client to payout its obligations via annuitized payments until the client age of 98 years old. Ms. Moran's current age is unclear, and we only know that her retirement annuity stream would last for 20 years. If she is 50 and retires in 12 years at 62, then her 20-year annuity stream would run out at 82 years old, with the perpetuity having to extend to cover an additional 16 years.

The aggregate amount that must be placed into deposit will be less when considering the annuity will be less when considering the payments from the annuity will be made over a longer period. The $840,000 will be paid out over 36 years instead of 20 years as figured on the case of the vice president of research, Ms. Jill Moran. The annual payment must equal $23,333.33 and at 9% does equal $2,100.00 per annum, which makes the deposit amount, $21,233.33.

Question 2: Given your understanding of cash flow, financial statements, ratio analysis and time value of money, provide an example of why the integration of these concepts would be important. Do not quote the text, but think through these tools and provide an example for the others in the class as to the importance and value of these ideas when they are effectively integrated.