Question

In: Economics

Blake, who is married and the father of two, is 30 years old and expects to...

Blake, who is married and the father of two, is 30 years old and expects to continue to work until the age of 65. He earns $85,000 per year and expects annual salary increases of 2% over his working life. He also expects inflation to be 3% during that time. His personal risk-free discount rate is 6%, his consumption is 20%, and his marginal tax rate is 28%. Determine Blake's human life value.

Solutions

Expert Solution

Blake's human life value equals the present value of Blake's future earnings.

Inflation adjusted risk free discount rate = [ ( 1 + 0.06) ( 1+0.03) ] - 1

Inflation adjusted risk free discount rate = 2.91%

The present value of future earnings after consumption = $1,437,546.48

Year Earnings Taxes Earnings after taxes Consumption Earnings after consumption
1 85000 23800 61200 12240 48960
2 86700 24276 62424 12484.8 49939.2
3 88434 24761.52 63672.48 12734.496 50937.984
4 90202.68 25256.7504 64945.9296 12989.18592 51956.74368
5 92006.7336 25761.88541 66244.84819 13248.96964 52995.87855
6 93846.86827 26277.12312 67569.74516 13513.94903 54055.79612
7 95723.80564 26802.66558 68921.14006 13784.22801 55136.91205
8 97638.28175 27338.71889 70299.56286 14059.91257 56239.65029
9 99591.04739 27885.49327 71705.55412 14341.11082 57364.44329
10 101582.8683 28443.20313 73139.6652 14627.93304 58511.73216
11 103614.5257 29012.0672 74602.4585 14920.4917 59681.9668
12 105686.8162 29592.30854 76094.50767 15218.90153 60875.60614
13 107800.5525 30184.15471 77616.39783 15523.27957 62093.11826
14 109956.5636 30787.8378 79168.72578 15833.74516 63334.98063
15 112155.6949 31403.59456 80752.1003 16150.42006 64601.68024
16 114398.8088 32031.66645 82367.14231 16473.42846 65893.71384
17 116686.7849 32672.29978 84014.48515 16802.89703 67211.58812
18 119020.5206 33325.74578 85694.77485 17138.95497 68555.81988
19 121400.931 33992.26069 87408.67035 17481.73407 69926.93628
20 123828.9497 34672.10591 89156.84376 17831.36875 71325.47501
21 126305.5287 35365.54802 90939.98063 18187.99613 72751.98451
22 128831.6392 36072.85898 92758.78025 18551.75605 74207.0242
23 131408.272 36794.31616 94613.95585 18922.79117 75691.16468
24 134036.4375 37530.20249 96506.23497 19301.24699 77204.98797
25 136717.1662 38280.80654 98436.35967 19687.27193 78749.08773
26 139451.5095 39046.42267 100405.0869 20081.01737 80324.06949
27 142240.5397 39827.35112 102413.1886 20482.63772 81930.55088
28 145085.3505 40623.89814 104461.4524 20892.29047 83569.1619
29 147987.0575 41436.37611 106550.6814 21310.13628 85240.54513
30 150946.7987 42265.10363 108681.695 21736.33901 86945.35604
31 153965.7346 43110.4057 110855.3289 22171.06579 88684.26316
32 157045.0493 43972.61382 113072.4355 22614.48711 90457.94842
33 160185.9503 44852.06609 115333.8842 23066.77685 92267.10739
34 163389.6693 45749.10741 117640.5619 23528.11238 94112.44954
35 166657.4627 46664.08956 119993.3732 23998.67463 95994.69853
Present value $1,437,546.48

Rahul Sunny answered 2 years ago
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