EQUITY METHOD

Pension information:

Current Salary 40000 Years until retirement 3 Annual compensation increases 5% Discount rate 10% Benefit 2%

1) Construct the pension table.

PART TWO

a) Consider a risky project, D, with an outcome $4 with a probability of 60% and $16 with a probability of 40%. Compute EV, the expected value of D.

b) Mr. Ralph wishes to invest in D. Ralph has a utility function given by U(x) = 0.25x^2 + 10. Compute CE for Ralph. Is he risk averse, risk-neutral or risk loving given his CE? Explain.

c) Mrs. Ralph also wishes to invest in D. Mrs. Ralph has a utility function given by U(x) = 10(x)^(1/2). Compute CE for Mrs. Ralph. Is ahe risk averse, risk-neutral or risk loving given her CE? Explain.