2. From the College Scorecard, median annual cost of attending college is $12,871. Median salary for college attendees is $58,880 (using past data based on tax data instead of surveys). Median salary of someone who does not attend college is roughly $30,336. Suppose everyone retires at age 65, everyone leaves high school at age 18, and college lasts 4 years. Within the same year, costs and earnings arrive simultaneously. a. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.05 (R=1/(1.05))? What is the present discounted value of going to college? Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)? Hint: 1+R+R²+...+R46=(1-R47)/(1-R). 1+R+R²+R³=(1-R4)/(1-R). R4+R$+...+R46=(R4- R47)/(1-R). b. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.15 (R=1/(1.15))? What is the present discounted value of going to college? Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)? c. Why might salaries of college graduates be higher than salaries of college attendees? Briefly describe at least two reasons. d. Now suppose you are entering your last year of college. You would have to pay 1 year of tuition and forgo 1 year of salary at $50,500 to complete your degree. If you complete your degree, you will earn $62,200. Maintain the high discount rate (R=1/1.15). You anticipate working 44 years if you work instead of going to college (43 years if you go to college). Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question

2c and 2d 

Requirement
Given:
Average costs of attending UCR= $12,871
Average salary for UCR attendees = $58,880
The average salary af someone who does nat attend college is roughly = $30,336
ie Average salary of someone who does not attend college is $30,336 ($651/week from slides x 52 weeks)
52 weeks 1 year
everyone retires at age 65,
everyone leaves high school at age 18,
and college lasts 4 years.
Requirement (a)
If the interest rate is 0.05 (r=1/(1.05), the present discounted value of working instead of going to college
is:
when, r=11.05 r=0.95
The present discounted value af functioning correctly now instead of going to college is:
=30336(1+.95) = 2,889.14
The present worth of attending UCR is:
=($58,880 - 12,871|1+.95)4=21,825(1.95|4 =21,82514.459 = 1,509.44
The following estimates reveal a great deal regarding going to UCR:
(1-r47)(1-r]=91.05=18.2(1-r4)(1-r|=0.19.05-3.8(r4-r47)(1-r)=(81-.09).0s-14.4
Yes, so going to UCR is a great offer, according to the calculations. They will eam a higher average
income after graduating from college.
Requirement (b)
If the discount rate is 0.15 (r-1/(1.15)), the present discounted value of working immediately instead
of going to college is:
when,
= 11.15r = 0.869
The current discounted value of functioning properly now instead of going to college is:
=30,336(1+0.869)=30,3361.869 = 16,231.13
The present worth of attending UCR is:
=(58,880-12,871)(1+0.869)4=46,009(1.869)4=3705512 20= 3,037.29
The following estimates reveal a great deal about going to UCR:
(1-r47|(1-r]=98.091=10.76(1-r4)(1-r)=0.3170.091=3.48(r4-r47)(1-r)=(,6827-0.0112).091=7.37
No, the attendance here is higher than the graduates. As a result, attending UCR is not a good deal
here.
Transcribed Image Text:Requirement Given: Average costs of attending UCR= $12,871 Average salary for UCR attendees = $58,880 The average salary af someone who does nat attend college is roughly = $30,336 ie Average salary of someone who does not attend college is $30,336 ($651/week from slides x 52 weeks) 52 weeks 1 year everyone retires at age 65, everyone leaves high school at age 18, and college lasts 4 years. Requirement (a) If the interest rate is 0.05 (r=1/(1.05), the present discounted value of working instead of going to college is: when, r=11.05 r=0.95 The present discounted value af functioning correctly now instead of going to college is: =30336(1+.95) = 2,889.14 The present worth of attending UCR is: =($58,880 - 12,871|1+.95)4=21,825(1.95|4 =21,82514.459 = 1,509.44 The following estimates reveal a great deal regarding going to UCR: (1-r47)(1-r]=91.05=18.2(1-r4)(1-r|=0.19.05-3.8(r4-r47)(1-r)=(81-.09).0s-14.4 Yes, so going to UCR is a great offer, according to the calculations. They will eam a higher average income after graduating from college. Requirement (b) If the discount rate is 0.15 (r-1/(1.15)), the present discounted value of working immediately instead of going to college is: when, = 11.15r = 0.869 The current discounted value of functioning properly now instead of going to college is: =30,336(1+0.869)=30,3361.869 = 16,231.13 The present worth of attending UCR is: =(58,880-12,871)(1+0.869)4=46,009(1.869)4=3705512 20= 3,037.29 The following estimates reveal a great deal about going to UCR: (1-r47|(1-r]=98.091=10.76(1-r4)(1-r)=0.3170.091=3.48(r4-r47)(1-r)=(,6827-0.0112).091=7.37 No, the attendance here is higher than the graduates. As a result, attending UCR is not a good deal here.
2. From the College Scorecard, median annual cost of attending college is $12,871. Median
salary for college attendees is $58,880 (using past data based on tax data instead of surveys).
Median salary of someone who does not attend college is roughly $30,336. Suppose
everyone retires at age 65, everyone leaves high school at age 18, and college lasts 4 years.
Within the same year, costs and earnings arrive simultaneously.
a. What is the present discounted value of working immediately instead of going to
college if the discount rate is 0.05 (R=1/(1.05))? What is the present discounted
value of going to college? Financially speaking, is going to college a good deal
(assuming you would be continuously working and no wage growth)? Hint:
1+R+R2+...+R46=(1-R47)/(1-R). 1+R+R²+R³=(1-R*)/(1-R). Rª+R$+...+R46=(R4.
R4T/(1-R).
b. What is the present discounted value of working immediately instead of going to
college if the discount rate is 0.15 (R=1(1.15))? What is the present discounted
value of going to college? Financially speaking, is going to college a good deal
(assuming you would be continuously working and no wage growth)?
c. Why might salaries of college graduates be higher than salaries of college
attendees? Briefly describe at least two reasons.
d. Now suppose you are entering your last year of college. You would have to pay 1
year of tuition and forgo 1 year of salary at $50,500 to complete your degree. If
you complete your degree, you will earn $62,200. Maintain the high discount rate
(R=1/1.15). You anticipate working 44 years if you work instead of going to
college (43 years if you go to college). Financially speaking, is going to college a
good deal (assuming you would be continuously working and no wage growth)?
Transcribed Image Text:2. From the College Scorecard, median annual cost of attending college is $12,871. Median salary for college attendees is $58,880 (using past data based on tax data instead of surveys). Median salary of someone who does not attend college is roughly $30,336. Suppose everyone retires at age 65, everyone leaves high school at age 18, and college lasts 4 years. Within the same year, costs and earnings arrive simultaneously. a. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.05 (R=1/(1.05))? What is the present discounted value of going to college? Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)? Hint: 1+R+R2+...+R46=(1-R47)/(1-R). 1+R+R²+R³=(1-R*)/(1-R). Rª+R$+...+R46=(R4. R4T/(1-R). b. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.15 (R=1(1.15))? What is the present discounted value of going to college? Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)? c. Why might salaries of college graduates be higher than salaries of college attendees? Briefly describe at least two reasons. d. Now suppose you are entering your last year of college. You would have to pay 1 year of tuition and forgo 1 year of salary at $50,500 to complete your degree. If you complete your degree, you will earn $62,200. Maintain the high discount rate (R=1/1.15). You anticipate working 44 years if you work instead of going to college (43 years if you go to college). Financially speaking, is going to college a good deal (assuming you would be continuously working and no wage growth)?
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