Question

Normandin Inc. has an unfunded pension liability of $575 million that must be paid in 20 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 6.8%, what is the present value of this liability?

Answer 1

The present value of this unfunded pension liability of $575 million in 20 years at a discount rate of 6.8% is $154,256,257.63.

What is the present value?

The present value of an asset or liability refers to its future value discounted from a future period to the present period.

The present value can be computed using the PV table or formula.

We can also use an online finance calculator to determine the present value of the unfunded pension liability, as follows:

Data and Calculations:

N (# of periods) = 20 years

I/Y (Interest per year) = 6.8%

PMT (Periodic Payment) = $0

FV (Future Value) = $575,000,000

Results:

PV = $154,256,257.63

Total Interest $420,743,742.37

Thus, the present value of this unfunded pension liability of $575 million in 20 years at a discount rate of 6.8% is $154,256,257.63.

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