You are thirty-five years oldwith a steady job and no debt. Your financial capital is worth F35 = $150,000 and is invested entirely in the stock market in mutual funds. Your current salary is w35 = $50,000 per year (payable at the end of the year), and is expected to grow by gw = 5% per year until you retire at age sixty-two. You expect to live until you are eighty years old. Assume that the minimum level of expenses that you need is $18,000 per year, and that this amount is growing at the rate of 2% per year.What is the value of your current economic net worth,W35, assuming a valuation rate of v = 6% p.a., annual compounding? Now imagine that (overnight) the stock market crashes and your financial capital falls by 40%. However, at the same time interest rates have dropped by 200 basis points so the “new” valuation rate is v = 4% p.a., annual compounding.

What is the revised value of your economic net worth W35? Has it declined/increased? Explain.