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Inter-temporal Costs and Benefits

Harvey is currently a Junior Analyst at a financial firm.  His annual salary is $30,000, and past experience leads him to believe that the real (inflation adjusted) value of his salary will remain at that level in the future.  (Assume he is paid at the end of the year.)  He aspires to work in office of the firms General Counsel, but to do so he is told he will need a JD. Further inquiries produce the following information:

• It would take three years of full-time study to obtain a JD, and the tuition and fees for each year (payable at the beginning of the year) are $20,000.

• He will need to resign his current position if he enters law school, but he can expect to earn $5,000 per year consulting on social policy issues, payable at the end of each of the three years.

• He is fortunate enough to live in the city in which the university providing the JD program is located, so he can keep his current housing arrangement.

• HE is 35 years old now; he would be 38 if he completes the JD program in timely fashion, and he anticipates working until he is 68.

• Discussions with students who have completed the JD program recently, and who have career interests similar to his lead Harvey to expect the following career profile after completion of the doctoral program at age 38:  Two years of employment as a Managing Director at an annual salary of $35,000 (payable at the end of the year), then at age 40, selection for the General Counsel’s office, at a salary of $55,000, keeping this salary (in constant dollars) until retirement.

• Harvey’s discount rate is three percent per year

Answer the following questions for Harvey:

a. Is it a good financial investment for me to get a JD? (Be sure to describe your answer in detail. Your answer should include a timeline and equations expressing the benefits and costs. If you use Excel to calculate the benefits and costs, please include the worksheet with your answers).

b. What if I wait five years before deciding whether to enter a JD program; how would this make any difference to the calculation of whether this is a good investment for me? (Make sure to indicate how this would alter either your benefit or cost equations; note that you do not need to redo calculations in (a) above)

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