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 $115k 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 1

Present Value of Income if job continued

=

r = 0.07

n = 25 years

=

= 885672.321604

Present Value if he goes for graduation

=

=

=1,256,525.14918

% Difference = 1,256,525.14918 - 885,672.321604 / 885,672.321604

= 41.87%

1 (1+r)" PeriodicCash Flow * 7

We were unable to transcribe this image

We were unable to transcribe this image

We were unable to transcribe this image