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Calculate hew new consumption under scenario

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Mary is 25 and working at her dream job. She is also extremely forward-looking and very good at planning.

(a) She is making $70,000 per year. She plans to start working half-time at the age of 50, so that she can volunteer more. (She is an extremely careful planner.) She expects to retire at age 65. Find the present discounted value (PDV) of her income, using R = 0.03.

(b) Mary expects to live to 90. She wants to spend the same amount of money in each period of her life. Denoting her annual consumption by C, derive a formula for the PDV of her consumption spending.

(c) Find C. (To afford her spending, PDV of income must be equal to the PDV of spending.)

(d) Suppose that her boss is very pleased with her work and gives her an unexpected bonus of $10,000. Mary is delighted and, naturally, gets back to plan her consumption again. Suppose that she believes the bonus to be a one-off event. Calculate her new C.

(e) On the other hand, suppose that Mary’s boss tells her that if she keeps performing as well as she has, she can expect the bonus every year. Calculate hew new consumption under this scenario. (Mary is a very conscientious worker, so she can count on the bonus.)

Reference no: EM131324926

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