Problem:
A Masters of Accountancy degree at CU cost $10,000 for an additional fifth year of education beyond the bachelors degree. Assume that all tuition is paid at the beginning of the year. A student considering this investment must evaluate the present value of cash flows from possessing a graduate degree versus holding only the undergraduate degree. Assume that the average student with an undergraduate degree is expected to earn an annual salary of $48,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters of Accountancy degree is expected to earn an annual salary of $63,000 per year(assumed to be paid at the end of the year) for 9 years after graduation. Assume a minimum rate of return of 10%.
1. Determine the net present value of cash flows from an undergraduate degree. (using EX2)
2. Determine the net present value of cash flows from a Masters degree, assuming no salary is earned during the graduate year of schooling.
3. What is the net advantage or disadvantage of pursuing a graduate degree under these assumptions?
Present Value of an Annuity of $1 at Compound Interest
| Year |
6% |
10% |
12% |
15% |
20% |
| 1 |
0.943 |
0.909 |
0.893 |
0.87 |
0.833 |
| 2 |
1.833 |
1.736 |
1.69 |
1.626 |
1.528 |
| 3 |
2.673 |
2.487 |
2.402 |
2.283 |
2.106 |
| 4 |
3.456 |
3.17 |
3.037 |
2.855 |
2.589 |
| 5 |
4.212 |
3.791 |
3.605 |
3.353 |
2.991 |
| 6 |
4.917 |
4.355 |
4.111 |
3.785 |
3.326 |
| 7 |
5.582 |
4.868 |
4.564 |
4.16 |
3.605 |
| 8 |
6.21 |
5.335 |
4.968 |
4.487 |
3.837 |
| 9 |
6.802 |
5.759 |
5.328 |
4.772 |
4.031 |
| 10 |
7.36 |
6.145 |
5.65 |
5.019 |
4.192 |