Question

Stone Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Stone 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%. Required: To fulfill this pension obligation, what amount does Stone Company need to have at the time of th employee's retirement (what is the present value of the retirement benefit at the time the employee retires)? a. $600,000 b. $450,000 c. $263,585 d. $241,821

Answer 1

v fix annual payment X ДА В DE $ 30,000 8.786150 annual payment present value factor (annuity due for 15 periods at 9%) present value of retirement benefit at the time when employee retires $ 263,585 hence, the correct answer is c. $263,585

for formulas and calculations, refer to the image below -

ДА В c annual payment 30000 present value factor (annuity due for 15 periods at| 9%) --PV(0.09,15,1,0,1) present value of retirement benefit at the time when employee retires =D2*D3 hence, the correct answer is c. $263,585

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