Michelle Adams is deciding on one of two career choices, before retiring in 20 year time.
Choice 1 Michelle can go to a prestigious graduate school for two years and obtain a degree. Including tuition and living expenses, she expects to pay $35,000 at the end of each year for two years while at school. After graduating, she expects to land a demanding job that pays $90,000 at the end of the third year, and grows at a constant rate of 5% each year (so at the end of the fourth year she expects 90,000*1.05=$94,500 etc.) She will retire in 18 years after finishing graduate school.
Choice 2 Michelle can continue in her present job. She expects to be paid $42,000 at the end of the year, and expects her salary to increase by 10% every year, paid at the end of each year. She expects to work 20 years before retiring.
ANSWER ALL OF THE FOLLOWING:
a. Create a time line with cash flows for Michelle’s first choice.
b. Create a time line with cash flows for Michelle’s second choice.
c. Suppose Michelle’s discount rate is 12%. Which career should she choose?