Question

You are deciding if you should go to Law School, which is a three year degree. If you do not go to law school, you will earn $47,000 per year. While you are in law school, you will have the opportunity to take a part-time job working for a professor for $12,000 per year. Tuition is $30,000 per year. Once you get a law degree, you will earn $100,000 per year. For simplicity, assume no raises. a) Suppose the interest rate is 5% and you are considering a 10 year horizon (either you work for 10 years with no law degree, or you get your law degree and then work for an additional 7 years). Should you go to law school? Show all your work. (I encourage you to do this in excel, in which case you may print out and attach your spreadsheet. Make sure it is formatted so the print-out is easy to read and interpret.) b) Is the law degree more or less worth it as the return to education decreases? c) Is the law degree more or less worth it as the interest rate increases?

Answer 1

Do not go to law school
Year	Cash inflows
1	$47,000
2	$47,000
3	$47,000
4	$47,000
5	$47,000
6	$47,000
7	$47,000
8	$47,000
9	$47,000
10	$47,000
NPV	$362,921.54

The NPV of the earnings by not going to law school is  $362,921.54 .

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Go to law school
Year	Cash outflows	Cash inflows	Net cash flows
1	$30,000	$12,000	($18,000)
2	$30,000	$12,000	($18,000)
3	$30,000	$12,000	($18,000)
4	$0	$100,000	$100,000
5	$0	$100,000	$100,000
6	$0	$100,000	$100,000
7	$0	$100,000	$100,000
8	$0	$100,000	$100,000
9	$0	$100,000	$100,000
10	$0	$100,000	$100,000
		NPV	$450,830.23

The NPV of the earnings by going to law school is $450,830.23

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Therefore you should go to law school and get an additional degree as the present value of earnings by going to law school is higher than not going to law school.

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The law degree will be less worth if the return to education decreases because having law degree or not having law degree would not make any difference in the career prospects.

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If the interest rate increases say to 10%, the present value of earnings by having law degree equals $321,008.18 .

The present value of the earnings by not having law degree equals $288,794.65 .

Thus the law degree is worth more even as the interest rate increases.