Question

Ben the Builder has been working for a few years and decided to go back to school. Being originally from Bothell, he has set his sights on UW Bothell. Currently, living and working out of state, he's thinking about moving to Washington a year early to establish residency. It's worth considering, knowing that in state tuition is $12,000 per year, while out-of-state tuition is $50,000 per year. He's currently living out of state with friends for free, but if he moves to Washington now, he will expect to pay $24,000 in rent and utilities for the year to establish residency. It's a great price for housing, but he has to pay all $24,000 in advance (at t-0) to lock in the deal He's been doing well on the job over the years, and his current employer has offered him a job upon graduation, paying $70,000 per year with a 3 year employment guarantee. (Assume the salary is paid all at the end of the year of work.) part A) Draw the cash flow timeline for both scenarios, assuming Ben pays for 4 years of tuition part B) What is the IRR for the early move and in-state tuition scenario? part C) What is the IRR for the out-of-state tuition scenario? part D) What would you recommend Ben do?

Answer 1

a). Timeline for early move & in-state tuition:

$70,000 $70,000 $70,000 t- 7 t 8 t-0 t 6 t 2 $12,000 $12,000 $12,000

Timeline for out-of-state tuition:

$70,000 $70,000 $70,000 t- 6 t-1 t- 5 t- 3 t- 7 t- 8 t- 2 $50,000 $50,000 $50,000 50,000

b). IRR for the early move and in-state tuition = 21.58%

c). IRR for out-of-state tuition = 1.09%

(IRR calculated using cash flows and IRR function)

	Year (n)	0	1	2	3	4	5	6	7	8	IRR
Early move & in-state tuition	Cash flow	(24,000)	(12,000)	(12,000)	(12,000)	(12,000)	-	70,000	70,000	70,000	21.58%
Out of state	Cash flow	-	(50,000)	(50,000)	(50,000)	(50,000)	-	70,000	70,000	70,000	1.09%

Note: Tuition fee is paid at the beginning of the year while Ben will be paid salary at the end of the year so there will be a 2-year gap from year 4 to year 6 when there is no cash flow.

d). Ben should opt for the early move and in-state tuition since the IRR is much higher compared to the out-of-state tuition scenario.