Question

Personal Investment Analysis Find of the cost of a bachelor's degree at the university of your choice assume additional costs of $16,000 for an additional fifth year of education to get Master's degree. Assume that all tuition is paid at the beginning of the year. A student considering this investment must evaluate the present value of cash flows from possessing a graduate degree versus holding only the undergraduate degree. Assume that the average student with an undergraduate degree is expected to earn an annual salary of $55,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters degree is expected to earn an annual salary of $76,000 per year (assumed to be paid at the end of the year) for nine years after graduation. Assume a minimum rate of return of 10%. Determine the net present value of cash flows from an undergraduate degree. Use the present value table provided in this chapter 26. Determine the net present value of cash flows from a Masters degree, assuming that no salary is earned during the graduate year of schooling. What is the net advantage or disadvantage of pursuing a graduate degree under these assumption? Bachelor's degree costing 43,000 Master's degree costing 59,000

Answer 1

Answer:

1.         Annual salary .............................................................................   $ 55,000

Present value of $1 annuity for 10 years at 10% .....................     ×    6.145

Present value of undergraduate option as

of the end of undergraduate degree

(beginning of graduate degree)..................................................... $ 337975

2.         Annual tuition at the beginning of the graduate year .............      $ (16000)

Annual salary .............................................................................  $    76000

Present value of $1 annuity for 9 years at 10% .......................    ×       5.759

Present value salary to end of graduate year..........................      $    437684

Present value of $1 for 1 year at 10%.......................................    ×       0.909

Present value of salary at the beginning of graduate year.....       $     397855 (rounded)

Present value of graduate option at beginning of graduate

year (salary less tuition).......................................................     $      381855

Note: The present values of parts (1) and (2) must both be determined as of the beginning of the graduate year in order to be compared. Thus, the present value of the salary at the end of graduate school must be brought back one period to the beginning of the graduate year, since this salary stream is delayed by one year of schooling. The timeline below shows the calculation.

3.         Present value of graduate option .............................................         $ 381855

Present value of undergraduate option ....................................             337975

Net benefit of graduate option..................................................         $     43880

Note to Instructors: This solution accounts for the opportunity cost of graduate school in terms of lost earnings during the graduate year. To maintain simplicity, the solution does not account for likely growth in earnings over time.