J Johnson Case
By: Nilesh Charan • March 27, 2019 • Coursework • 2,950 Words (12 Pages) • 944 Views
Answer 1
In case of United States, the retirement age of a person is 62 years. In the given case, John was 42 years of age in 2012. Thus, f everything went good, John has a working life of around 20 years left.
Hence, John has an expected working life of 20 years left where he will be entitled of reduced income.
Answer 2
Part A
In the given case, in year 2011, John was promoted from a Marketing analyst to a marketing associate. As result the annual salary of John increased from $47,293 in year 2010 to $53,289 in year 2011. It is assumed that the promotion of John took place in the beginning of the year. Mr John was working since last 11 years. Thus the average annual salary of John pre accident was round $44K. The salary earned in year 2000 and year 2001 is not considered reason being the same was earned while attending university, hence that was pat time. Another the unusual payment received is not considered in the below calculations.
Year | Annual Income | Adjusted Income | Remarks |
2000 | $ 25,385 | $ - |
|
2001 | $ 32,513 | $ - |
|
2002 | $ 44,235 | $ 44,235 |
|
2003 | $ 46,246 | $ 46,246 |
|
2004 | $ 52,352 | $ 47,352 | Bonus adjusted |
2005 | $ 50,000 | $ 50,000 |
|
2006 | $ 51,750 | $ 50,750 | Bonus adjusted |
2007 | $ 42,452 | $ 42,452 |
|
2008 | $ 35,000 | $ 35,000 |
|
2009 | $ 30,153 | $ 30,153 |
|
2010 | $ 47,293 | $ 47,293 |
|
2011 | $ 53,289 | $ 50,289 | Bonus adjusted |
Average |
| $ 44,377 |
|
Part B
Expected real growth rate refers to the actual growth rate in the salary minus the current inflation rate prevailing in the market. Mr John in his initial years of working i.e. year 2000 and year 2001 was working while continuing in the university. Full time he started working in year 2002.
Annual income in 2002 | $ 44,235 |
Annual income in 2011 | $ 53,289 |
Change | $ 9,054 |
Annual growth rate | 1.88% |
The annual rate was calculated as follows: ((Current value/ Past value) ^1/n)-1)
Inflation rate for the last 10 years average – 2.36%
Year | Inflation rate |
2014 | 0.80% |
2013 | 1.50% |
2012 | 1.70% |
2011 | 3.00% |
2010 | 1.50% |
2009 | 2.70% |
2008 | 0,1% |
2007 | 4.10% |
2006 | 2.50% |
2005 | 3.40% |
Average | 2.36% |
(Source_ http://www.usinflationcalculator.com/inflation/current-inflation-rates/)
Now, being the Expected real growth rate refers to the actual growth rate in the salary minus the current inflation rate prevailing in the market. John in this case has a negative growth rate.
Annual growth rate | 1.88% |
Inflation rate | 2.36% |
Expected growth rate | -0.48% |
Answer 3
Part A
Mr John after his medical problem was unable to continue his normal work. His annual salary was reduced to $30,000. Thus post accident his annual salary will be $30,000.
Part B
The growth rate is assumed to remain the same for the coming years i.e. 1.88%. On the other hand, the inflation rate in United States is on a declining trend. It is expected to be around 0% in 2015. Thus, it is assumed that the inflation rate will be 0%. Thus in this case, he expected growth rate will be around 1.88%.
Answer 4
In order to calculate the discount rate. the risk free rate of return is a better approach. Considering the same, the rate of 5 year treasury securities is taken as the base. The rate is approx 1.68%.
Source_ http://www.bankrate.com/rates/interest-rates/treasury.aspx
Answer 5
Growth rate is assumed at the rate of 1.88% as discussed above.
Year | Salary post accident | Salary Pre accident | Net difference (A) | Net Present Value (B) 1.68% | Total Value (A*B) |
0 | 53,289 |
|
|
|
|
1 | 54,291 | 30,000 | 24,291 | 0.98 | 23,889.49 |
2 | 55,312 | 30,564 | 24,748 | 0.97 | 23,936.48 |
3 | 56,351 | 31,139 | 25,213 | 0.95 | 23,983.56 |
4 | 57,411 | 31,724 | 25,687 | 0.94 | 24,030.74 |
5 | 58,490 | 32,320 | 26,170 | 0.92 | 24,078.00 |
6 | 59,590 | 32,928 | 26,662 | 0.90 | 24,125.36 |
7 | 60,710 | 33,547 | 27,163 | 0.89 | 24,172.82 |
8 | 61,851 | 34,178 | 27,674 | 0.88 | 24,220.36 |
9 | 63,014 | 34,820 | 28,194 | 0.86 | 24,268.00 |
10 | 64,199 | 35,475 | 28,724 | 0.85 | 24,315.74 |
11 | 65,406 | 36,142 | 29,264 | 0.83 | 24,363.57 |
12 | 66,635 | 36,821 | 29,814 | 0.82 | 24,411.49 |
13 | 67,888 | 37,514 | 30,375 | 0.81 | 24,459.50 |
14 | 69,164 | 38,219 | 30,946 | 0.79 | 24,507.62 |
15 | 70,465 | 38,937 | 31,527 | 0.78 | 24,555.82 |
16 | 71,789 | 39,669 | 32,120 | 0.77 | 24,604.12 |
17 | 73,139 | 40,415 | 32,724 | 0.75 | 24,652.52 |
18 | 74,514 | 41,175 | 33,339 | 0.74 | 24,701.01 |
19 | 75,915 | 41,949 | 33,966 | 0.73 | 24,749.59 |
20 | 77,342 | 42,738 | 34,604 | 0.72 | 24,798.27 |
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|
|
| 4,86,824.06 |
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