Question

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 $74k 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 $116k per year until you retire at age 65. The master’s program you are interested in costs $23k per year.

Note: The term “k” is used to represent thousands (× $1,000).

Required: At an opportunity cost of 8%, determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation.

Answer 1

Alternative 1 : If i continue with my current job

Then, Inflow = $ 74k per year for (55 - 30) 25 years

Thus, Present Value of this inflow = 74K * [(1 + 0.08)25 -1] / [0.08 * (1 + 0.08)25] = $ 789.93K

Alternative 2 : If i go back to university for master's program

Outflow for 1st 2 years = $23k per year for 2 years.

Then, Inflow = $116k for (65 - 32) 33 years.

So, Net Present Value = -23,000 / (1.08) - 23,000 / (1.08)2 + 116000 / (1.08)3 + ........+ 116000 / (1.08)35

i.e. = $ 1104.06k

Thus, the percentage difference between most and least profitable alternatives, with the least profitable option as the basis = (1104.06k - 789.93k) / 789.93k * 100 = 39.77%