3. (Bhattacharya, Chapter 5) Fun with IRR. Suppose you have just graduated from college and are deciding on a career.Your four career options, along with your salary in each of the four earning periods, are displayed in Table 5.3. Assumethat any career will only last four periods before retirement.Table 5.3: Career options and salary information for Exer-cise 11.SalaryOccupationPeriod 0 Period 1 Period 2 Period 3OphthalmologistAccountantStarving artistSports superstar-51101223.141115Assume your discount factor is 6 = 0.95. Interpret this assumption.b. Find the value of the interest rate r that corresponds to your discount factor.c. Assuming 6 = 0.95, calculate the net present value (NPV) of becoming an ophthalmologist and of becoming anaccountant. Which career do you prefer?d. Now assume your discount factor is 6 = 0.6. Calculate the net present value (NPV) of becoming an ophthalmologistand of becoming an accountant. Now which career do you prefer? Explain.a.

a) The discount factor measures the present value of a future cash flows. It is used to measure the…

Table 5.3: Career options and salary information for Exer- cise 11. Salary Occupation Period o Period 1 Period 2 Period 3 Ophthalmologist -5 10 12 5 Accountant Starving artist Sports superstar 2 3. 4. 1 1 1 15 Assume your discount factor is 6 = 0.95. Interpret this assumption. Find the value of the interest rate r that corresponds to your discount factor. Assuming 5 = 0.95, calculate the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Which career do you prefer? Now assume your discount factor is 6 = 0.6. Calculate the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Now which career do you prefer? Explain.

Table 5.3: Career options and salary information for Exer- cise 11. Salary Occupation Period o Period 1 Period 2 Period 3 Ophthalmologist -5 10 12 5 Accountant Starving artist Sports superstar 2 3. 4. 1 1 1 15 Assume your discount factor is 6 = 0.95. Interpret this assumption. Find the value of the interest rate r that corresponds to your discount factor. Assuming 5 = 0.95, calculate the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Which career do you prefer? Now assume your discount factor is 6 = 0.6. Calculate the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Now which career do you prefer? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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