Question

Rebecca is 29 and considering going to graduate school so she sits down to calculate whether it is worth the large sum of money. She knows that her first year tuition will be $54,000, due at the beginning of the year (that is, right away). She estimates that the 2nd year of tuition would be $56,000. She also estimates that her living expenses above and beyond tuition will be $10,000 per year (assume this extra expense occurs at the end of each year only when she is in graduate school) for the first year and will increase to $11,000 the next year. She expects to earn $24,000 for an internship (Assume this inflow occurs one year from now). Were she to forgo graduate school she would be able to make $65,000 at the end of this year and expects that to grow 4% annually. With a graduate degree, she estimates that she will earn $116,000 per year after graduation, again with annual 4% increases. Either way, she plans to work until 64. The interest/discount rate is 5%. What is the NPV of her graduate education?

A2745138.44

B 895157.84

C900268.95

D898497.46

Answer 1

		Year	Amount	P V Factor@ 5%	Present Value
Cash outflow		0	-54000	1	-54000.000
Cash outflow		1	-56000	0.952	-53333.333
Cash outflow		1	-10000	0.952	-9520.000
Cash outflow		2	-11000	0.907	-9973.333
Cash inflow		1	24000	0.952	22848.000
Cash inflow		3	45696	0.863	39458.133
Cash inflow		4	47523.84	0.822	39082.342
Cash inflow		5	49424.79	0.783	38710.129
Cash inflow		6	51401.79	0.746	38341.461
Cash inflow		7	53457.86	0.710	37976.304
Cash inflow		8	55596.17	0.677	37614.625
Cash inflow		9	57820.02	0.644	37256.391
Cash inflow		10	60132.82	0.614	36901.568
Cash inflow		11	62538.13	0.584	36550.124
Cash inflow		12	65039.66	0.557	36202.028
Cash inflow		13	67641.24	0.530	35857.247
Cash inflow		14	70346.89	0.505	35515.749
Cash inflow		15	73160.77	0.481	35177.504
Cash inflow		16	76087.2	0.458	34842.480
Cash inflow		17	79130.69	0.436	34510.647
Cash inflow		18	82295.91	0.415	34181.974
Cash inflow		19	85587.75	0.396	33856.431
Cash inflow		20	89011.26	0.377	33533.989
Cash inflow		21	92571.71	0.359	33214.618
Cash inflow		22	96274.58	0.342	32898.288
Cash inflow		23	100125.6	0.325	32584.971
Cash inflow		24	104130.6	0.310	32274.638
Cash inflow		25	108295.8	0.295	31967.261
Cash inflow		26	112627.6	0.281	31662.810
Cash inflow		27	117132.7	0.268	31361.260
Cash inflow		28	121818.1	0.255	31062.581
Cash inflow		29	126690.8	0.243	30766.747
Cash inflow		30	131758.4	0.231	30473.730
Cash inflow		31	137028.7	0.220	30183.504
Cash inflow		32	142509.9	0.210	29896.043
Cash inflow		33	148210.3	0.200	29611.318
Cash inflow		34	154138.7	0.190	29329.306
Cash inflow		35	160304.3	0.181	29049.979
				NPV	1017927.514
less	Opportunity income loss
	year		PVF@ 5%	PV
	1	65000	0.952381	61904.7619
	2	67600	0.907029	61315.19274
					123219.9546
			Profit from Graduation		894707.559
		Answer (B) is correct