Answered: Suppose that you are in the fall of…

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter5: Probability: An Introduction To Modeling Uncertainty

Section: Chapter Questions

Problem 5P: Students taking the Graduate Management Admissions Test (GMAT) were asked about their undergraduate...

See similar textbooks

Question content area top

Part 1

(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

$35,000

per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at

percent per year until you retire in

years. As a law student, you will be paying

$30,000

per year tuition for each of the

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

percent per year until you retire

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

years of law school. In addition, you will be giving up a little more than

$109,000

in lost income over the three years of law school:

$35,000

the first year,

$36,400

the second year, and

$37,856

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

percent.

b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of

percent? Remember that you will be in law school for

years before you start to work as a lawyer. (Hint: assume that you are paid at the end of each year so that your first salary payment if you decide to go to law school occurs 4 years from now.)

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

percent?

Question content area bottom

Part 1

a. What is the present value of the future earnings that you will realize by going directly to work, assuming a discount rate of

percent?

$enter your response here

(Round to the nearest cent.)

Part 2

b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of

percent?

$enter your response here

(Round to the nearest cent.)

Part 3

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

percent?

$enter your response here

(Round to the nearest cent.)

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions