Michelle Adams is deciding on one of two carrer choices, before retiring in 20 y
ID: 2775849 • Letter: M
Question
Michelle Adams is deciding on one of two carrer choices, before retiring in 20 years time.
Choice 1. Michelle can go to a prestigious graduate school for two years and obtain a degree including tuition and living expenses, she expects to pay $35000 at the end of each year for two years while at school. After graduating, she expect to land a demanding hob that pays $90000 at the end of the third year, and grows at a constant rate of 5% each year (at then end of the fourth years she expects 90000*1,05=$94500 etc.) She will retire in 18 years after finishing graduate school.
Chioce 2. Michelle can continue in her present job. She expects to be paid $42000 at the end of the current year, and expects her salary to increase 10% every year, paid at the end of each year (i.e. at the end of the second year her salary will be $42000*1.1, and so on). She expects to work 20 years retiring.
Suppose that michelle"s discount rate is 12%. Which career should she choose?
Explanation / Answer
Option 1 is better because NPV is more
Option 1 Cash flow Year Cash Flow PV at 12% PV of Cash flow 1 -35000 0.89286 -31250.00 2 -35000 0.79719 -27901.79 3 90000 0.71178 64060.22 4 94500 0.63552 60056.46 5 99225 0.56743 56302.93 6 104186 0.50663 52784.00 7 109396 0.45235 49485.00 8 114865 0.40388 46392.18 9 120609 0.36061 43492.67 10 126639 0.32197 40774.38 11 132971 0.28748 38225.98 12 139620 0.25668 35836.86 13 146601 0.22917 33597.05 14 153931 0.20462 31497.24 15 161627 0.18270 29528.66 16 169708 0.16312 27683.12 17 178194 0.14564 25952.92 18 187104 0.13004 24330.87 19 196459 0.11611 22810.19 20 206282 0.10367 21384.55 NPV 645043.50