Question

Imprudential, Inc., has an unfunded pension liability of $800 million that must be paid in 16 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 9.5 percent, what is the present value of this liability?
(A) $195,316,570
(B) $172,286,761
(C) $191,013,583
(D) $183,522,855
(E) $187,268,219

Answer 1

Answer:

(E) $187,268,219

Explanation:

You have to take the amount of money and apply the formula to bring the amount to the present value, with the discount rate of 9,5%.

You have to use the next formula where n in ne number of years:

Present Value = amount of money /((1+doscount rate)^(n))

Present value = $800.000.000/((1+9,5%)^(16))

Present value= $187.268.219  

The operation reflect how much value the 800 millions today if they will be paid in 16 years in the future.  

Answer 2

Answer:

Present value of the liability = $187,268,219

Explanation:

the present value of a single payment to be made sometime in the future is calculated as follows:

$Present value = \frac{FV}{(1+i)^n}$

where FV is the payment to be made some time in the future= $800 million

i is the discount rate = 9.5%

and n is the number of years left before the payment is made= 16 years

$Present value = \frac{800,000,000}{(1+0.095)^1^6}$=187,268,219