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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%

jeff jeffy answered 1 year ago
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