PlatinumEssays.com - Free Essays, Term Papers, Research Papers and Book Reports
Search

J Johnson Case

By:   •  March 27, 2019  •  Coursework  •  2,950 Words (12 Pages)  •  851 Views

Page 1 of 12

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

 

 

 

 

 

     4,86,824.06

...

Download:  txt (8.3 Kb)   pdf (92.5 Kb)   docx (13.6 Kb)  
Continue for 11 more pages »