(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial implications of the two alternatives. Let's assume that your alternatives are as follows: If you take the "get a job" route you expect to start off with a salary of $45,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 5 percent per year until you retire in 43 years. As a law student, you will be paying $30,000 per year tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $75,000 per year. Moreover, you expect your salary to grow by 7 percent per year until you retire 38 years later. Clearly, your total expected lifetime salary will be higher if you become a lawyer. However, the additional future salary is not free. You will be paying $30,000 in tuition at the beginning of each of the 3 years of law school. In addition, you will be giving up a little more than $141,000 in lost income over the three years of law school: $45,000 the first year, $47,250 the second year, and $49,613 the third year. a. To start your analysis of whether to go to law school, calculate the present value of the future earnings that you will realize by going directly to work, assume a discount rate of 10 percent. b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent? Remember a. What is the present value of the future earnings that you will realize by going directly to work, assuming a discount rate of 10 percent? $(Round to the nearest cent.) b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent? $(Round to the nearest cent.) c. If you pay your law school tuition at the beginning of each year, what is the present value of your tuition, assuming a discount rate of 10 percent? $(Round to the nearest cent.)
(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial implications of the two alternatives. Let's assume that your alternatives are as follows: If you take the "get a job" route you expect to start off with a salary of $45,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 5 percent per year until you retire in 43 years. As a law student, you will be paying $30,000 per year tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $75,000 per year. Moreover, you expect your salary to grow by 7 percent per year until you retire 38 years later. Clearly, your total expected lifetime salary will be higher if you become a lawyer. However, the additional future salary is not free. You will be paying $30,000 in tuition at the beginning of each of the 3 years of law school. In addition, you will be giving up a little more than $141,000 in lost income over the three years of law school: $45,000 the first year, $47,250 the second year, and $49,613 the third year. a. To start your analysis of whether to go to law school, calculate the present value of the future earnings that you will realize by going directly to work, assume a discount rate of 10 percent. b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent? Remember a. What is the present value of the future earnings that you will realize by going directly to work, assuming a discount rate of 10 percent? $(Round to the nearest cent.) b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent? $(Round to the nearest cent.) c. If you pay your law school tuition at the beginning of each year, what is the present value of your tuition, assuming a discount rate of 10 percent? $(Round to the nearest cent.)
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
Related questions
Question
4
Transcribed Image Text:(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you
graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the
financial implications of the two alternatives. Let's assume that your alteratives are as follows:
If you take the "get a job" route you expect to start off with a salary of $45,000 per year. There is no way to predict what will happen in the future,
your best guess is that your salary will grow at 5 percent per year until you retire in 43 years. As a law student, you will be paying $30,000 per year
tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $75,000 per year. Moreover,
you expect your salary to grow by 7 percent per year until you retire 38 years later.
Clearly, your total expected lifetime salary will be higher if you become a lawyer. However, the additional future salary is not free. You will be
paying $30,000 in tuition at the beginning of each of the 3 years of law school. In addition, you will be giving up a little more than $141,000 in lost
income over the three years of law school: $45,000 the first year, $47,250 the second year, and $49,613 the third year.
a. To start your analysis of whether to go to law school, calculate the present value of the future earnings that you will realize by going directly to
work, assume a discount rate of 10 percent.
b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent? Remember
a. What is the present value of the future earnings that you will realize by going directly to work, assuming a discount rate of 10 percent?
$(Round to the nearest cent.)
b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of 10 percent?
(Round to the nearest cent.)
c. If you pay your law school tuition at the beginning of each year, what is the present value of your tuition, assuming a discount rate of 10
percent?
(Round to the nearest cent.)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education