Final answer:
The present value of lifetime income refers to the current value of all the future income that an individual expects to receive over their lifetime. It takes into account the time value of money, which means that future income is discounted to reflect its lower value compared to present income. To calculate the present value of lifetime income, you need to determine the amount of income you expect to earn each year, the number of years you expect to earn that income, and the discount rate.
Step-by-step explanation:
The present value of lifetime income refers to the current value of all the future income that an individual expects to receive over their lifetime. It takes into account the time value of money, which means that future income is discounted to reflect its lower value compared to present income. To calculate the present value of lifetime income, you need to determine the amount of income you expect to earn each year, the number of years you expect to earn that income, and the discount rate.
Here is a step-by-step process to calculate the present value of lifetime income:
- Determine the amount of income you expect to earn each year. For example, if you expect to earn $50,000 per year.
- Determine the number of years you expect to earn that income. For example, if you expect to work for 40 years.
- Apply a discount rate to each year's income to calculate its present value. The discount rate represents the rate of return that an individual could earn by investing their money in an alternative investment. For example, if the discount rate is 6%.
- Sum up the present values of all the years of income to find the present value of lifetime income.