Question

Assume that you are earning $30,000/year for all your working years if you have just a high school diploma. However, your salary will increase to $60,000 if you obtain a college degree (4 years program). Thetuition costs for college are $6000/year. You graduate from college when you are 22 and you will retire at 65. You can invest money at 6%. Find the net value of the college education.

Answer 1

If I had a high school diploma only, I would work from age 18 to 65 (For 47 years).

Present worth (PW) of my income ($) = 30,000 x P/A(6%, 47) = 30,000 x 15.5890** = 467,670

If I attend college, I would work from age 22 to 65 (For 43 years).

Net PW of my income ($) = PW of salary - PW of tuition costs for 4 years

= 60,000 x P/A(6%, 43) x P/F(6%, 4) - 6,000 x P/A(6%, 4)

= 60,000 x 15.3062** x 0.7921** - 6,000 x 3.4651 = 727,442 - 20,791 = 706,651

Net value of college education ($) = 706,651 - 467,670 = 238,981

**From P/A and P/F Factor tables