Reference no: EM13215029

John Johnson Lost Earnings Case

In early 2012,John Johnson, a 42 year old Marketing Associate1 at Cisco was feeling increasingly run down. After a series of doctor visits it was discovered that his kidneys were
failing. It turned out that he'd been born with only one kidney and, for reasons that were unclear, that one was failing. After
consulting with the medical team at UCSF, John and his sister Jane started the series of tests to see if Jane could donate one of her kidneys to John. By July 2012, the doctors determined that Jane could donate a kidney to John and on July 23, 2012 the
team operated. After a few days in recovery John was doing really well. His new kidney was doing its job and John was
starting to feel better. John's elderly father picked John up from the hospital and got him in the car for the drive back to John's apartment. Haflway home, a delivery truck owned by Acme, Inc. ran a red light and smashed into the passenger side of the car. John was hospitalized for another month to recover from the significant internal injuries he sustained in the accident. After
another couple of months at home doing rehab, he was ready to return to work. But it was clear once he got back to work that his brain had suffered from the trauma. Tasks that used to take him an hour would now take him all afternoon - if he could do them at all. His work as a marketing analyst didn't require him to be physically active, but it did require the use of his brain. After he'd been back at work for 6 weeks, John's supervisor called him in to tell him that it just wasn't working; he was no longer a capable marketing analyst. John was not surprised at the news; he knew that he was no longer capable of doing the work. John's supervisor told him that the management team had discussed John's case and wanted to keep him on at
Cisco doing work that he was capable of performing. The idea was to try him out at various positions to see what worked for John and worked for Cisco. Obviously his pay would be reduced, but Cisco management was willing to commit to paying him a salary of $30,000 per year for full time work. John was grateful to Cisco for the offer but also very discouraged about the loss of income. At $30,000 per year, he was going to have trouble affording his apartment and any thought of marrying his partner
was out. Furthermore, while his kidney had survived the accident, he was going to have to pay $1,200 per year for medicine
to deal with his transplanted kidney and that was going to be hard to afford on a reduced income. John decided to seek legal
counsel. After some searching, John found Steve Henry an attorney specializing in employment law. Mr. Henry advised John
that he could file suit against Acme for lost earnings potential.

Assignment:

You've been retained by Mr. Henry on behalf of John Johnson to calculate the present value of John's reduced income. To do
this assignment you will need to:

1) Determine John's expected working life to determine how many years of reduced earnings he will have.

a. Determine his average annual salary pre-accident.

b. Determine the average expected real growth rate in earnings over his life time.

3) Determine John's actual expected earnings given his diminished capacity.

a. Determine his annual salary post-accident.

b. Determine the average expected real growth rate in earnings over his life time.

4) Determine an appropriate discount rate (risk-free, real rate of return) to apply to his lost earnings.

5) Calculate the net present value of John's lost earnings until his projected retirement date.

6) Calculate the net present value of the reduced social security payments John will receive because of his lowered earnings
based on:

a. John's life expectancy3

b.Social Security benefits of $1,192 instead of $1,684 he would have reasonably expected if he had been able to continue working as a marketing analyst.

c. The same discount rate as you used above.

 

Year Annual Income Employer Title Notes
2000 $25,385 Starbucks Barista Job held while attending university
2001 $32,513 Starbucks Head Barista Job held while attending university
2002 $44,235 Cisco Marketing analyst
2003 $46,246 Cisco Marketing analyst Started new position at Intel in November
2004 $52,352 Intel Software Analyst 1 $5,000 guaranteed bonus for the first year
2005 $50,000 Intel Software Analyst 1 No bonus due to poor performance review
2006 $51,750 Intel Software Analyst 1 $1,000 bonus and a 1.5% raise
2007 $42,452 Intel / MonkeyBrains Software Analyst 1 / VP of Marketing Co-founded MonkeyBrains (a startup)
2008 $35,000 MonkeyBrains VP Marketing
2009 $30,153 MonkeyBrains / Starbucks VP Marketing / Barista MonkeyBrains failed. Worked part time at Starbucks
2010 $47,293 Starbucks / Cisco Marketing analyst Rehired by Cisco.
2011 $53,289 Cisco Marketing associate $3,000 bonus. Promoted to associate.
2012 $14,293 Cisco Marketing associate Partial year earnings.