Personal Investment Analysis (CP10-2) A Masters of Accountancy degree at Central
ID: 2417324 • Letter: P
Question
Personal Investment Analysis (CP10-2)
A Masters of Accountancy degree at Central University costs $12,000 for an additional fifth year of education beyond the bachelor's degree. Assume that all tuition is paid at the beginning of the year. A student considering this investment must evaluate the present value of cash flows from possessing a graduate degree versus holding only the undergraduate degree. Assume that the average student with an undergraduate degree is expected to earn an annual salary of $50,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters of Accountancy degree is expected to earn an annual salary of $66,000 per year (assumed to be paid at the end of the year) for nine years after graduation. Assume a minimum rate of return of 10%.
· Calculate the net present value of cash flows from an undergraduate degree. Use the present value table provided in this chapter in Exhibit 5 or look up Net Present Value tables on the internet
· Determine the net present value of cash flows from a Masters of Accountancy degree, assuming no salary is earned during the graduate year of schooling.
· What is the net advantage or disadvantage of pursuing a graduate degree under these assumptions?
Explanation / Answer
Calculation of net present value of cash flows from an undergraduate degree.
1. Discounted cash outflow for an under graduate degree = NIL
2. Discounted cash inflow for an under gradute degree = cash inflow * Present value annuity factor for 10 years
= 50,000 * PVAF ( 10%,10)
= 50,000 * 6.14
= $307,000
3. Savings in not pursuing masters degree = $12,000 { opportunity cost }
Net present value of cash flows from an undergraduate degree = 2+3 -1 = 307,000+ 12,000 - 0
= $319,000
Calculation of net present value of cash flows from a Masters of Accountancy degree.
1. Present value of cash outflow = $ 12,000 [ Tuiton fees ]
2. present value of cash inflows for 9 years = 66,000 * present value annuity factor for 10% , 9 yrs
= 66,000 * 5.75
= $ 379,500
Net present value of cash flows from Masters degree = 2-1 = 379,500- 12,000 = 367,500
3. Net Advantage of pursuing graduate degree = 367500 - 319,000 = 48,500
Conclusion; Since, NPV is higher- it is better to pursue graduate degree in fifth year.
Note: This analysis is made at the beginning of fifth year.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.