Question
In: Finance
Suppose that, at age 30, you might wish to leave your job and pursue a master’s...
Suppose that, at age 30, you might wish to leave your job and pursue a master’s degree. If you choose to remain at your job, your employer would pay you $75k per year until retirement, at age 55. If you go back to the university, you would have to sacrifice 2 years of income, but once you graduate, you would receive $113k per year until you retire at age 55. The master’s program you are interested in costs $22k per year. Note: The term “k” is used to represent thousands (× $1,000). Required: At an opportunity cost of 9%, determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation.
Solutions
Expert Solution
| Option 1 : Continue to do job. | ||||
| Amount Recieved Every year(PMT) | $ (75,000.00) | |||
| Expected Return ( Interest) | 9.00% | |||
| Amount of Time (NPER) =55-30= | 25 | Years | ||
| Present Value Of Cashflow | $736,693.47 | |||
| Option 2 : Go back to University and graduate | ||||
| Present value of cash inflows after 2 years | ||||
| Amount Recieved Every year(PMT) | $ (113,000.00) | |||
| Expected Return ( Interest) | 9.00% | |||
| Amount of Time (NPER)=55-32= | 23 | Years | ||
| Present Value Of Cashflow After 2 years | $1,082,563.37 | |||
| Present Value Of Cashflow at t =0 | $911,171.93 | |||
| Present value of cash Outflows | ||||
| Present value of cash outflows = 22000 / 1.09 + 22000 / 1.09^2 | ||||
| Present value of cash outflows = | $ (38,700.00) | |||
| Net Cashflow at t =0 | $872,471.93 | |||
| % Difference = 872471.93-736693.47/736693.47 | ||||
| % Difference = | 18.43% |
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