You are 35 years old and work as an operations manager at Rogers. 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 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 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 per annum by age 55 and a further 20% chance you will be earning $1,000,000 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.

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 rate of 2.5%. Also, assume salaries are inflation-adjusted.

Note to Question #4C: To make things easier for you, assume that during any given ten-year period your salary is constant at the average rate between the two ending nodes. Thus, for example, during each of the first ten years -- between age 35 and 45 -- assume there is a 40% chance you are earning $100,000 and a 60% chance you are earning $50,000.

  

Transcribed Image Text:

$1,000,000 20% $625,000 80% $250,000 35% 25% $175,000 65% 75% $100,000 40% 30% 10% $75,000 60% 70% 90% $50,000 Age 35 Age 45 Age 55 Age 65 $1,000,000 20% $625,000 80% $250,000 35% 25% $175,000 65% 75% $100,000 40% 30% 10% $75,000 60% 70% 90% $50,000 Age 35 Age 45 Age 55 Age 65

Answer rating: 100% (QA)

Part A There are three ways to reach a salary of 250000 1 st way 40 chance of promotion 35 chance of promotion 80 chance of not being promoted 2nd way... View the full answer