Question
You are currently 35 years old and work for Ontario Hydro as an operations manager. You currently earn $50,000 per year. Based on statistics and
You are currently 35 years old and work for Ontario Hydro as an operations manager. You currently earn $50,000 per year. Based on statistics and past employment history, you estimate a 40% chance that during the next ten years you will be promoted and will be earning $100,000 per annum (after tax, in year 2023 dollars) by the time you are 45 years old. Likewise, there is a 60% you will remain with your current position and responsibilities during the next ten years and will thus be earning the same $50,000 per annum (after tax, in year 2023 dollars) by age 45. Assuming you are promoted between age 35 and 45, there is a 35% chance you will be further promoted and will be earning $250,000 (after tax, in year 2007 dollars) per annum by age 55 and a further 20% chance you will be earning $1,000,000 (after tax, in year 2023 dollars) by age 65. Even if you are not promoted during the next ten or twenty years, there is still a chance you will be promoted in your final ten years at Ontario Hydro. Either way, everyone must retire at age 65. See the following chart for a graphical illustration of your career and salary paths. Confirm you understand this problem by listing all eight (8) possible paths. Part A: What is the probability you retire with a salary of $250,000? Part B: What is the probability you retire with a salary of $100,000? Part C: Please compute the (present value of) human capital at the age of 35 under the (inflation-adjusted) valuation rates of 1% (low) and 6% (high). Explain your results
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