Question

Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $49,000 annually for life starting with the first $49,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time? (For all requirements, round your final answers to the nearest whole dollar.)

Answer 1

Answer a.

Annual payment with first payment at the time of retirement is $49,000
Period of annuity is 15 years
Interest rate is 9%

Present Value at time of retirement = $49,000 * PVAD of $1 (9%, 15)
Present Value at time of retirement = $49,000 * 8.78615
Present Value at time of retirement = $430,521

Answer b.

Time to retirement = 20 years

Present Value at current time = $430,521 * PV of $1 (9%, 20)
Present Value at current time = $430,521 * 0.17843
Present Value at current time = $76,818