Question

Assume that you are deciding whether to acquire a four-year university degree. Your only consideration at this moment is the degree as an investment for yourself. Costs per year are tuition fees of $600 and books at $100. The government also pays to the university an equivalent amount to your tuition fees to cover the real cost. If you don't go to university, you could earn $6000 per year as an acrobat. With a university degree, however, you know that you can earn $10,000 per year as an acrobat. Because of the nature of your chosen occupation, your time horizon for the investment decision is exactly 10 years after university; that is, if the investment is to be worthwhile, it must be so within a 10-year period after graduation. The market rate of interest is 5 percent. Would you make the investment in a university degree? This problem involves calculating the present discounted value of a flow of future earnings. Please assume that you face a 14-year horizon. The first four year are the only opportunity you have to go to university; either you choose to go to university at the beginning of year one or never. After attending university graduation, you have exactly 10 years to work as a university educated acrobat. You will need to use a calculator for this problem. Please show your work. Using an Excel spreadsheet for your calculations is allowed.

Answer 1

You are having two options first is don't go to the college and start working as an acrobat for next 14 years

The present value of this cash flow stream is as follows

Second option is to go to college and start working after the study.

In this case you will be paying 600 +100 = 700

Refer the attached excel worksheet

The present value of going college is higher than not going to college so you must attend college.

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