Question

Describe how to use the net present value or present discounted value computation formula to determine whether to invest in a 4-year college degree, given a high school diploma. Show how the costs of a college degree have two major components.

Answer 1

Net present value determines the present value of all future cash flows including initial investment in a project.

For a 4 year, college degree Net Present Value determine the present value of cash flows during 4 years and initial investment.

Net Present Value = [Cash Flow/(1+i)^t ] - Initial investment

Where

i = required return

t = duration of project

The costs of a college degree have two major components as follows:-

• Initial Investment
• Annual costs such as tution fees, room charges, food charges etc.