Question

1. Personal Investment Analysis Find of the cost of a bachelor's degree at the university of your choice assume additional costs of $16,000 for an additional fifth year of education to get Master'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 $55,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters degree is expected to earn an annual salary of $76,000 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%. Determine the net present value of cash flows from an undergraduate degree. Use the present value table provided in this chapter 26. Determine the net present value of cash flows from a Masters degree, assuming that no salary is earned during the graduate year of schooling. What is the net advantage or disadvantage of pursuing a graduate degree under these assumption?

Answer 1

Master Degree	16000	Additional cost
Undergraduate	55,000	end of year
Years	10
Fees at beginning of year	16000
Graduate Masters degree	76,000
Years	9
Rate of return	10%
PV of cash flows from under graduate degree	337,951	=PV(10%,10,-55000,0,0)
PV of cash flows from masters graduate degree	381,896	=PV(10%,10,-76000,0,0)-(76000*1/1.1)-16000
We subtracted (76000/1.1) because no salary in year of masters and 16000 is additional cost to be paid at year beginning.
Net advantage	43,945	381,896-337,951