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 1 year ago

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