J Johnson Case
By: Nilesh Charan • March 27, 2019 • Coursework • 2,950 Words (12 Pages) • 851 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/currentinflationrates/)
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/interestrates/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 
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