Question

1.Jill is considering getting a masters degree in dance. If she does, she will spend $40,000 on tuition and books to get a college education (during the first time period), she will spend $130,000 on tuition and books to get a master's degree (during the second time period), and her degree will earn her $900,000 during the remainder of her work-life (during the third time period). If she does not go to school, she will earn $70,000 a year for the first two periods and $500,000 for the third period. Jill's discount rate is11%.
a)Approximately what is Jill's present value of obtaining a master's degree?

b) What is Jill's present value of not obtaining the masters degree?

c)Will she choose to go to school? why?

Answer 1

1) a) Present value PV= Cash flow/(1+r)^t

So, PV of obtaining a master's degree = -40000/(1+.11)^0 - 130000/(1+.11)^1 + 900000/(1+.11)^1

= 585620

b) PV of not obtaining a master's degree = 70000/(1+.11)^0 + 70000/(1+.11)^1 + 500000/(1+.11)^1

= 546860

c) She will choose to go to school because clearly the cpresent value of obtaining the master degree is more than not to obtaining the degree.