Rebecca is 29 and considering going to graduate school so she sits down to calcu

Question

Rebecca is 29 and considering going to graduate school so she sits down to calculate whether it is worth the large sum of money. She knows that her first year tuition will be $54,000, due at the beginning of the year (that is, right away). She estimates that the 2nd year of tuition would be $56,000. She also estimates that her living expenses above and beyond tuition will be $10,000 per year (assume this extra expense occurs at the end of each year only when she is in graduate school) for the first year and will increase to $11,000 the next year. She expects to earn $24,000 for an internship (Assume this inflow occurs one year from now). Were she to forgo graduate school she would be able to make $65,000 at the end of this year and expects that to grow 4% annually. With a graduate degree, she estimates that she will earn $116,000 per year after graduation, again with annual 4% increases. Either way, she plans to work until 64. The interest/discount rate is 5%. What is the NPV of her graduate education?

A2745138.44

B 895157.84

C900268.95

D898497.46

Explanation / Answer

Year Amount P V Factor@ 5% Present Value Cash outflow 0 -54000 1 -54000.000 Cash outflow 1 -56000 0.952 -53333.333 Cash outflow 1 -10000 0.952 -9520.000 Cash outflow 2 -11000 0.907 -9973.333 Cash inflow 1 24000 0.952 22848.000 Cash inflow 3 45696 0.863 39458.133 Cash inflow 4 47523.84 0.822 39082.342 Cash inflow 5 49424.79 0.783 38710.129 Cash inflow 6 51401.79 0.746 38341.461 Cash inflow 7 53457.86 0.710 37976.304 Cash inflow 8 55596.17 0.677 37614.625 Cash inflow 9 57820.02 0.644 37256.391 Cash inflow 10 60132.82 0.614 36901.568 Cash inflow 11 62538.13 0.584 36550.124 Cash inflow 12 65039.66 0.557 36202.028 Cash inflow 13 67641.24 0.530 35857.247 Cash inflow 14 70346.89 0.505 35515.749 Cash inflow 15 73160.77 0.481 35177.504 Cash inflow 16 76087.2 0.458 34842.480 Cash inflow 17 79130.69 0.436 34510.647 Cash inflow 18 82295.91 0.415 34181.974 Cash inflow 19 85587.75 0.396 33856.431 Cash inflow 20 89011.26 0.377 33533.989 Cash inflow 21 92571.71 0.359 33214.618 Cash inflow 22 96274.58 0.342 32898.288 Cash inflow 23 100125.6 0.325 32584.971 Cash inflow 24 104130.6 0.310 32274.638 Cash inflow 25 108295.8 0.295 31967.261 Cash inflow 26 112627.6 0.281 31662.810 Cash inflow 27 117132.7 0.268 31361.260 Cash inflow 28 121818.1 0.255 31062.581 Cash inflow 29 126690.8 0.243 30766.747 Cash inflow 30 131758.4 0.231 30473.730 Cash inflow 31 137028.7 0.220 30183.504 Cash inflow 32 142509.9 0.210 29896.043 Cash inflow 33 148210.3 0.200 29611.318 Cash inflow 34 154138.7 0.190 29329.306 Cash inflow 35 160304.3 0.181 29049.979 NPV 1017927.514 less Opportunity income loss year PVF@ 5% PV 1 65000 0.952381 61904.7619 2 67600 0.907029 61315.19274 123219.9546 Profit from Graduation 894707.559 Answer (B) is correct

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