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How would you go about estimating the Net Present Value (NPV) of a college education by...

How would you go about estimating the Net Present Value (NPV) of a college education by estimating the future earning with and without a college education. Please show an example.

What is the relationship between Net Present Value (NPV) and Profitability Index (PI)?

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Answer #1

While taking any decision we will consider the relevant costs & income.

Here By going to colege, we will incur some & Will get some additional revenue ( Even if not gone to college he could earn some revenue).

Thus We receive salary as Income & Will incur College fees and will loose other revenue earning opportunity.

Thus The PV of revenue ( Salary) Must meet PV of College fees & PV of revenue foregone.

PV of College Education = [PV of Future cash flows with COllege education - PV of Cash Outflows for Education ] - [ PV of Cash flows without Education ]

PI = [PV of cash Outflows + NPV ] / PV of cash Outflows

Advicable if NPV > 0, PI > 1

Else advicable not to go college.

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