Question

In: Accounting

Suppose that, at age 30, you might wish to leave your job and pursue a master’s...

Suppose that, at age 30, you might wish to leave your job and pursue a master’s degree. If you choose to remain at your job, your employer would pay you $74k per year until retirement, at age 55. If you go back to the university, you would have to sacrifice 2 years of income, but once you graduate, you would receive $114k per year until you retire at age 55. The master’s program you are interested in costs $22k per year. Note: The term “k” is used to represent thousands (× $1,000). Required: At an opportunity cost of 8%, determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation. Answer % Intermediate calculations must be rounded to 3 decimal places (at least). Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Solutions

Expert Solution

The Question can be answered using the discounted cashflow method Amount ($)
Option -1
Stay at the current Job
A Earnings per year 74000
B Number of Years 25 (Difference of Current age -30 and retirement age 55)
C opputunity cost % 8%
D The present value of Annuity for 8% for 25 years                10.674
A*D Discounted cashflow amount      7,89,876.00
Option-2
Leave the Job and pursue Studies
A Intital investment on college fee for 2 years     (42,370.370) year -1 fee is not discounted it is assumed it is paid at the beginning of the year
year 2 fee is discounted at 8% for 1 year
B Revised Salary per year for the remaining period till retirement 114000
C Number of years 23 (Difference of( Current age -30 + study period -2 years) and retirement age 55)
D The present value of Annuity for 8% for 23 years 10.371
B*D Discounted Salary receipts    11,82,294.00
(B*D)-A Net Receipt after College fee    11,39,923.63
percentage of Difference between two jobs 44.32%
(1,139,923.63-789,876)/789,876.00
The least favorable option is to stay in current job hence it is used as a basis

The Present Value of Annuity can be calculated using Excel or Calculator or manually by using the formula

PV Annuity Due​ = C×[i1−(1+i)−n​]×(1+i)

where:

C=cash flow per period

i=interest rate

n=number of payments​ ​

ekkarill92 answered 3 years ago
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