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nism-series-xb-hlv-impact-extended-working-life-25-to-30-years[ INVESTMENT ADVISER (LEVEL 2) ]

In Charu's case (Current income = Rs. 6,00,000 p.a., inflation = 6%, investment return = 10%, real discount rate = 3.7736%), what happens to her calculated Gross Human Life Value if her working life increases from 25 years to 30 years?

[ A ]HLV decreases because older retirement age increases mortality risk

[ B ]HLV increases from Rs. 96,01,652 to Rs. 1,06,62,492 because there are 5 additional years of future earnings to be discounted and replaced[ CORRECT ]

[ C ]HLV remains identical at exactly Rs. 96,01,652

[ D ]HLV is reduced by 50% due to retirement superannuation taxes

Takeaway

Extending Charu's working life from 25 to 30 years increases her Gross HLV from Rs. 96,01,652 to Rs. 1,06,62,492, so option B is correct.

Derivation

Using the same real discount rate of 3.7736%, extending Nper from 25 to 30 years in the PV formula (PV(3.7736%, 30, -6,00,000)) yields Rs. 1,06,62,492, compared to Rs. 96,01,652 at 25 years. The five additional years of income replacement add roughly Rs. 10.6 Lakhs to the HLV, since each extra year of discounted future salary directly increases the total present value being replaced. This tests the direct, monotonic relationship between working horizon (Nper) and HLV — the same variable tested in reverse in the 'HLV declines with age' conceptual question elsewhere in this set.

Why the others fail

A — HLV decreases because older retirement age increases mortality risk

A longer working horizon increases economic earning capacity and therefore increases HLV; it does not decrease it due to mortality risk considerations.

C — HLV remains identical at exactly Rs. 96,01,652

HLV is directly dependent on Nper (tenure of remaining working life); changing the tenure from 25 to 30 years necessarily changes the calculated HLV.

D — HLV is reduced by 50% due to retirement superannuation taxes

HLV is a gross present value calculation of income replacement and is not subject to an arbitrary 50% reduction for retirement superannuation taxes.