Question

Question 6 John Jones is deciding on one of two career choices, before retiring in 40 years time. Choice 1 John can go to a prestigious graduate school for two years and obtain a degree. Including tuition and living expenses, he expects to pay $75,000 at the end of each year for two years while at school. After graduating, he expects to land a demanding job that pays $150,000 at the end of the third year, and grows at a constant rate of 5% each year (so at the end of the fourth year he expects 150,000*1.05 etc.) He will retire in 38 years after finishing graduate school.

Choice 2 John can continue in his present job. He expects to be paid $84,000 at the end of the year, and expects his salary to increase by 6% every year, paid at the end of each year. He expects to work for 40 years before retiring. If John’s discount rate is 10%, which career choice should he pursue?

Please use formulas if needed so I understand.

Answer 1