Question

We will attempt to calculate IRR for a would-be pediatrician using the following basic assumption. At age 22, the future pediatrician would start her 4 years of medical school, costing her $50,309/year. She would then complete 3 years of residency, during which she would earn an income of $60,094/year. Her salary as a pediatrician after her residency would be $181,000/year and she would work until age 65. For simplicity, we assume alternatively, she would go straight to find a job paying her $45,478/year starting age 22 if she did not pursue her pediatrician career, and she would work until age 65 as well.

1. Verify that the IRR would be 17.77% by calculating that the present value of her investment and return over her opportunity cost would be zero at this rate.
2. Now suppose the government want to lower the burden by providing student loans with zero interest rate to medical students. For simplicity, let us assume that the effect of such a policy means she would not incur any tuition costs during her medical schooling years. Instead, she needs to settle the total amount of 4 year’s tuition of $201,236 (= 4 x $50,309) at age 48. Verify that her IRR would now become 27.11%.

Answer 1