Question

Naples corporation has an unfunded pension liability of $327 million that must be paid in 16 years. what is the present value of this liability at a discount rate of 6.24 percent, compounded annually?

Answer 1

The present value of this liability at a discount rate of 6.24 percent, compounded annually is $124.15 million

What is unfunded pension liability?

Unfunded pension liability is the extent by which the pension liability of the company exceeds its pension assets, in other words, unfunded pension liability is the pension liability payable in 16 years minus pension asset.

In this case, we can determine the present value of the liability using the present value formula of a single  cash flow as shown thus:

PV=FV/(1+r)^N

PV=present value of the liability due in 16 years=unknown

FV=the amount of future liability= $327  million

r=discount rate=6.24%

N=number of years before the future liability becomes due=16

PV=327/(1+6.24%)^16

PV=$124.15 million

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