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 $40,000 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 45 years. As a law student, you will be paying $25,000 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
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 $40,000 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 45 years. As a law student, you will be paying $25,000 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
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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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
$40,000
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
45
years. As a law student, you will be paying
$25,000
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
39
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
$25,000
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
$126,000
in lost income over the three years of law school:
$40,000
the first year,
$42,000
the second year, and
$44,100
the third year.a. To start your analysis of whether to go to law school, calculate the present value of the future earnings that you will realize by going directly to work, assume a discount rate of
4
percent.b. What is the present value today of your future earnings if you decide to attend law school, assuming a discount rate of
4
percent? Remember that you will be in law school for
3
years before you start to work as a lawyer. (Hint: assume that you are paid at the end of each year so that your first salary payment if you decide to go to law school occurs 4 years from now.)c. If you pay your law school tuition at the beginning of each year, what is the present value of your tuition, assuming a discount rate of
4
percent?Question content area bottom
Part 1
a. What is the present value of the future earnings that you will realize by going directly to work, assuming a discount rate of
4
percent?$enter your response here
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