) Paula is considering going to law school. If she does, she will spend $60,000
ID: 2417637 • Letter: #
Question
) Paula is considering going to law school. If she does, she will spend $60,000 on tuition
and books to get a college education (during the first time period), $120,000 on tuition and books
to get a law degree (during the second time period), and her law degree will earn her $620,000
during the remainder of her work-life (during the third time period). Paula’s time preference
for money is associated with a per-period interest rate of 20 percent. Approximately what is
Paula’s present value of obtaining a law degree?
Explanation / Answer
Assuming Fund will flow at the end of each year Year (Cash ouflow) / Cash inflow PV Factor @ 20% PV of Cash flows 1 (60,000) 0.8333 (49,998) 2 (120,000) 0.6944 (83,328) 3 620,000 0.5787 358,794 Present value to obtain degree 225,468
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