Titan Corporation Has a Defined Benefit Pension Plan

question 51

Essay

Titan 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. 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%.
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?

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Definitions:

Overhead Rates

Ratios used to allocate indirect costs to products or services, based on a predetermined activity base such as labor hours or machine hours.

Machine-Hours

A measure of production time, referring to the total hours that machinery is operated in the manufacturing process.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate manufacturing overhead to products based on a certain activity base.

Customizing Department

A specialized department in a company that modifies products to meet specific customer requirements or preferences.