45. Your younger brother has come to you for advice. He is about to enter college...

45. Your younger brother has come to you for advice. He is about to enter college and has two options open to him. His first option is to study engineering. If he does this, his undergraduate degree would cost him $30,000 a year for four years. Having obtained this, he would need to gain two years of practical experience: in the first year he would earn $35,000, in the second year he would earn $40,000. He would then need to obtain his master’s degree, which will cost $35,000 a year for two years. After that he will be fully qualified and can earn $60,000 per year for 30 years.

His other alternative is to study financial accounting. If he does this, he would pay $25,000 a year for four years and then he would earn $50,000 per year for 35 years. The effort involved in the two careers is the same, so he is only interested in the earnings the jobs. provide. All earnings and costs are paid at the end of the year. What advice would you give him, if the market interest rate is 5 percent? (use a financial calculator to find the NPV)

Tell him to choose Engineering since its NPV is $526,611.09
Tell him to choose Financial Accounting since its NPV is $584,905.75
Tell him to choose Engineering since its NPV is $341,155.80
Tell him to choose Financial Accounting since its NPV is $409,205.58
Tell him to choose Engineering since its NPV is $599,134.32

Solutions

Expert Solution

Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =5%	Year	cash flow	present value of cash flow = cash flow/(1+r)^n r =5%
0	-30000	-30000	0	-25000	-25000
1	-30000	-27210.88435	1	-25000	-23809.52381
2	-30000	-25915.12796	2	-25000	-22675.73696
3	-30000	-24681.07424	3	-25000	-21595.93996
4	35000	28794.58662	4	50000	41135.12374
5	40000	31341.04666	5	50000	39176.30832
6	-35000	-24673.61892	6	50000	37310.76983
7	-35000	-24873.84655	7	50000	35534.06651
8	60000	40610.36172	8	50000	33841.9681
9	60000	38676.53497	9	50000	32230.44581
10	60000	36834.79521	10	50000	30695.66268
11	60000	35080.75735	11	50000	29233.96445
12	60000	33410.24509	12	50000	27841.87091
13	60000	31819.28104	13	50000	26516.06753
14	60000	30304.07718	14	50000	25253.39765
15	60000	28861.02589	15	50000	24050.8549
16	60000	27486.69132	16	50000	22905.5761
17	60000	26177.80126	17	50000	21814.83438
18	60000	24931.23929	18	50000	20776.03274
19	60000	23744.03742	19	50000	19786.69785
20	60000	22613.36897	20	50000	18844.47414
21	60000	21536.54188	21	50000	17947.11823
22	60000	20510.99227	22	50000	17092.49355
23	60000	19534.27835	23	50000	16278.56529
24	60000	18604.07462	24	50000	15503.39551
25	60000	17718.1663	25	50000	14765.13858
26	60000	16874.4441	26	50000	14062.03675
27	60000	16070.89914	27	50000	13392.41595
28	60000	15305.61823	28	50000	12754.68186
29	60000	14576.77927	29	50000	12147.31605
30	60000	13882.64692	30	50000	11568.87243
31	60000	13221.56849	31	50000	11017.97375
32	60000	12591.96999	32	50000	10493.30833
33	60000	11992.35238	33	50000	9993.62698
34	60000	11421.28798	34	50000	9517.739981
35	60000	10877.41712	35	50000	9064.514268
36	60000	10359.44488	36	50000	8632.870731
37	60000	9866.137978	37	50000	8221.781649
38	60000	9396.321884	38	50000	7830.268237
Net present value	sum of present value of cash flow	567672.2397	Net present value	sum of present value of cash flow	614151.0331
1-	false as npv of accounting is higher than engineering
2-	TRUE
3-	FALSE
4-	FALSE
5-	FALSE

jeff jeffy answered 1 year ago

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