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 $76k 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 $117k per year until you retire at age 55. The master’s program you are interested in costs $22k per year.

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

Required: At an opportunity cost of 7%, determine the percentage difference between your most and least profitable alternatives, with the least profitable option as the basis for your calculation.


Answer% Intermediate calculations must be rounded to 3 decimal places (at least). Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Answer 1

Solution :- Remaining Years to Job = 55 - 30 = 25 Years

Present Value of Earnings :- $76,000 * PVAF ( 7% , 25 )

= $76,000 * 11.6536

= $885,672.32

Now if he Graduate :-

then Cost of Graduation = - $22,000 - [ $22,000 / ( 1 + 0.07 ) ] = - $42,560.75

Present Value of Earnings if graduate = $115,000 * PVAF ( 7% , 23 ) * PVF ( 7% , 2 )

= $115,000 * 11.2722 * 0.8734

= $1,132,239.976

Net Cash Inflow if graduate = $1,132,239.98 - $42,560.75 = $1,089,679.229

Therefore Difference = $1,089,679.23 - $885,672.32 = $204,006.907

Percentage ( % ) = $204,006.91 / $885,672.32 = 0.2303 = 23.03%

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