King Corporation Has a Defined Benefit Pension Plan

Essay

King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King 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?