In: Accounting
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 (× $1,000). Required: At an opportunity cost of 8%, determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation. Answer % Intermediate calculations must be rounded to 3 decimal places (at least). Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).
The Question can be answered using the discounted cashflow method | Amount ($) | ||
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