(a) Your initial salary is $70,000 and is expected to grow by 3.5% per year. You expect an annual tax rate of 26.5% and the risk-free rate to be 1.1%. What is the present value of your lifetime earnings if you work for 25, 35, or 45 years? (Hint: Use the formula for an annuity with growth) Initial Salary Annual Growth Rate Annual Tax Rate Risk-Free Rate $70,000 3.50% 26.50% 1.10% Years PV(Earnings) 25 35 45 (b) If annual inflation is expected to be 2%, what is the real growth rate how many years of work will it take to earn the real present value of $2 million? 2.00% Annual Inflation Rate Real Growth Rate Years PV(Real Earnings) $0.00 (c) Suppose you save 10% of your real earnings each year and invest entirely into a broad stock market index. What rate of return is required by the market to have the real equivalent of $2.5 milliion in 25,35, or 45 years? (Hint: Use your answers from (a) in the percentage Savings Rate Real Value 10% $2,500,000 Years Market Return 25 35 45 (a) Your initial salary is $70,000 and is expected to grow by 3.5% per year. You expect an annual tax rate of 26.5% and the risk-free rate to be 1.1%. What is the present value of your lifetime earnings if you work for 25, 35, or 45 years? (Hint: Use the formula for an annuity with growth) Initial Salary Annual Growth Rate Annual Tax Rate Risk-Free Rate $70,000 3.50% 26.50% 1.10% Years PV(Earnings) 25 35 45 (b) If annual inflation is expected to be 2%, what is the real growth rate how many years of work will it take to earn the real present value of $2 million? 2.00% Annual Inflation Rate Real Growth Rate Years PV(Real Earnings) $0.00 (c) Suppose you save 10% of your real earnings each year and invest entirely into a broad stock market index. What rate of return is required by the market to have the real equivalent of $2.5 milliion in 25,35, or 45 years? (Hint: Use your answers from (a) in the percentage Savings Rate Real Value 10% $2,500,000 Years Market Return 25 35 45