Question

Oregon company's employees are eligible for retirement with benefits at the end of the year in which both age 60 is attained and they have completed 35 years of service. The benefits provide 15 years’ reimbursement for health care services of $39,000 annually, beginning one year from the date of retirement. Ralph young was hired at the beginning of 1988 by Oregon after turning age 22 and is expected to retire at the end of 2026 (age 60). The discount rate is 4%. The plan is unfunded. The pv of an ordinary annuity of $1 where n = 15 and i = 4% is 11.11839. The pv of $1 where n = 2 and i = 4% is 0.92456. With respect to ralph, what is oregon's expected postretirement benefit obligation (epbo) at the end of 2024, rounded to the nearest dollar?

a) $450,000

b) $468,000

c) $495,000

d) $512,000

Answer 1

To find Ralph's EPBO at the end of 2024, we calculate the present value of the annuity provided at retirement by multiplying the annual reimbursement by the present value factor for 15 years of payments and discounting it for two more years. The result is $400,960, however, this value is not among the provided answer options, indicating a possible error in the question or data.

Step-by-step explanation:

The question is about calculating the expected postretirement benefit obligation (EPBO) for Ralph who is an employee of the Oregon company. To calculate the EPBO for Ralph at the end of 2024, we need to consider the present value (PV) of an ordinary annuity. Given that the annual reimbursement for health care services is $39,000 and the PV of an ordinary annuity where n = 15 and i = 4% is 11.11839, we multiply $39,000 by 11.11839 to obtain the present value of the annuity. The calculation yields $39,000 * 11.11839 = $433,617.21, which is the present value of the retirement benefits that start one year after retirement. However, since Ralph will retire in two years (2026) and we want to know the EPBO at the end of 2024, we need to discount this amount back two more years using the present value factor for n = 2 and i = 4%, which is 0.92456. Multiplying the previous result by the PV factor gives $433,617.21 * 0.92456 = $400,960 (rounded to the nearest dollar), which is the EPBO for Ralph at the end of 2024. Since this value is not present in the answer options, it is likely there is a mistake in the question or in the data provided.