Question

In: Finance

1. You should invest in a professional degree if: a. Your post-degree income is greater than...

1. You should invest in a professional degree if:

a. Your post-degree income is greater than your income before earning the degree

b. The present value of the incremental benefits is greater than the present value of the incremental costs

c. The degree increases the present value of your human capital

d. You can get into an Ivy League School

2. The price a well-informed investor would pay for an asset in a free and competitive market is called the:

a. Market value

b. Asset value

c. Inherent value

d. Fundamental value

3. True/False. The price of a fixed-income security is uncertain up until the time it matures.

4. You are currently 43 years old and expect to retire in 25 years, and then you expect to live for another 20 years after retirement. Your current labor income is about $60,000. Assuming you have no savings, how much do you need to save from this point until retirement in order to replace 75% of your current income during retirement? (Assume no increase in wage and that your rate of interest will exceed inflation by 3%)

5. Cindy, who will graduate from college in a year is deciding whether to go on for her master’s degree which will last two years. She figures that if she takes a job immediately, she can earn $40,000 per year in real terms for the remainder of her working years. If she goes on for two more years of graduate study, however, she can increase her earnings to $50,000 per year. The cost of tuition is $40,000 per year in real terms. Is this a worthwhile investment if the real interest rate is 5% per year?—(Assume she will retire after working for 40 years. please show work

Expert Solution

1. ANSWER TO THE QUESTION IS OPTION B. THERE IS A CONCEPT KNOWN AS NET PRESENT VALUE(NPV) WHEREIN YOU INVEST IN A PROJECT IF THE PRESENT VALUE OF ITS FUTURE CASH INFLOW IS GREATER THAN THE PRESENT VALUE OF CASH OUTFLOW. THE SAME CONCEPT APPLIES HERE. NET PRESENT VALUE IS A CAPITAL BUDGETING METHOD WHICH HELPS YOU TO ELIMINATE UNPROFITABLE PROJECTS AND SELECT THE PROFITABLE ONE.

OPTION A IS INCORRECT BECAUSE PEOPLE INVEST IN PROFESSIONAL DEGREES NOT ONLY TO INCREASE THEIR INCOME BUT ALSO TO IMBIBE A LOT OF NEW QUALITIES AND SKILLS WHICH COLLECTIVELY WILL RESULT INTO INFLOW OF FUTURE BENEFITS.

OPTION C IS INCORRECT BECAUSE PROFESSIONAL DEGREES ALONG WITH A LOT OF OTHER FACTORS HELPS TO INCREASE THE PRESENT VALUE OF HUMAN CAPITAL. DEGREES ALONE DOES NOT RESULT IN INCREASE IN THE VALUE OF HUMAN CAPITAL.

OPTION D IS NOT RATIONAL BECAUSE PEOPLE DON'T INVEST IN PROFESSIONAL DEGREES JUST TO GET INTO REPUTED SCHOOLS.

jeff jeffy answered 1 year ago

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