Question

2. You are investing in a college education. The cost will be $12,000 at the beginning of each year for 4 years. You will also give up $30,000 in income at the end of each year because you cannot work. You expect to earn $15,000 more a year for 40 years, upon graduation, as a result of getting a college education. Are you getting a 10% rate of return on your investment in a college degree? What is the net present value of an investment in college? If it is less than 10% should you go to college? What return are you earning on it? What is your rate of return if college costs increase to $25,000 a year? What is the net present value?

Answer 1

Based on the given data pls find below steps, workings and answers:

The rate of return (IRR) is 7.38% which is lower than given 10%;

The NPV is negative $ 36749.84 at 10% cost of capital

If the required rate of return is less than 7.38% then this is feasible.

If the costs increased to $ 25000, then the rate of return (IRR) is 5.39%

The NPV is negative $ 82078.91

Cost Opportunity Cost Incremental Earnings Year Cost Opportunity Cost Incremental Earnings Year 0 0 1 1 -12,000 -12,000 -12,000 -12,000 -25,000 -25,000 -25,000 -25,000 2 -30,000 -30,000 -30,000 -30,000 2 -30,000 -30,000 -30,000 -30,000 3 4 3 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 14 15 16 17 13 14 15 16 17 18 18 19 19 20 Net Cash Flows -12,000 -42,000 -42,000 -42,000 -30,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 20 21 Discount Discounted Factor Flows 1.0000 -12,000.0 0.9091 -38,181.8 0.8264 -34,710.7 0.7513 -31,555.2 0.6830 -20,490.4 0.6209 9,313.8 0.5645 8,467.1 0.5132 7,697.4 0.4665 6,997.6 0.4241 6,361.5 0.3855 5,783.1 0.3505 5,257.4 0.3186 4,779.5 0.2897 4,345.0 0.2633 3,950.0 0.2394 3,590.9 0.2176 3,264.4 0.1978 2,967.7 0.1799 2,697.9 0.1635 2,452.6 0.1486 2,229.7 0.1351 2,027.0 0.1228 1,842.7 0.1117 1,675.2 0.1015 1,522.9 0.0923 1,384.4 0.0839 1,258.6 0.0763 1,144.2 0.0693 1,040.2 0.0630 945.6 0.0573 859.6 0.0521 781.5 0.0474 710.4 0.0431 645.9 0.0391 587.1 0.0356 533.8 0.0323 485.2 0.0294 441.1 0.0267 401.0 0.0243 364.6 0.0221 331.4 0.0201 301.3 0.0183 273.9 0.0166 249.0 0.0151 226.4 21 Net Cash Flows -25,000 -55,000 -55,000 -55,000 -30,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 22 Discount Discounted Factor Flows 1.0000 -25,000.0 0.9091 -50,000.0 0.8264 -45,454.5 0.7513 -41,322.3 0.6830 -20,490.4 0.6209 9,313.8 0.5645 8,467.1 0.5132 7,697.4 0.4665 6,997.6 0.4241 6,361.5 0.3855 5,783.1 0.3505 5,257.4 0.3186 4,779.5 0.2897 4,345.0 0.2633 3,950.0 0.2394 3,590.9 0.2176 3,264.4 0.1978 2,967.7 0.1799 2,697.9 0.1635 2,452.6 0.1486 2,229.7 0.1351 2,027.0 0.1228 1,842.7 0.1117 1,675.2 0.1015 1,522.9 0.0923 1,384.4 0.0839 1,258.6 0.0763 1,144.2 0.0693 1,040.2 0.0630 945.6 0.0573 859.6 0.0521 781.5 0.0474 710.4 0.0431 645.9 0.0391 587.1 0.0356 533.8 0.0323 485.2 0.0294 441.1 0.0267 401.0 0.0243 364.6 0.0221 331.4 0.0201 301.3 0.0183 273.9 0.0166 249.0 0.0151 226.4 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 22 23 23 24 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 24 25 26 25 26 27 28 29 30 27 28 29 30 31 32 31 32 33 33 34 34 35 35 36 36 37 37 38 38 39 39 40 40 41 41 42 42 43 44 43 44 10.00% 10.00% Cost of Capital Net Present Value IRR% -36,749.84 7.38% Cost of Capital Net Present Value IRR% -82,078.91 5.39%