You have just finished college, and you are debating between pursuing a career in banking or as a Finance Professor. If you become a banker, you can start your job today. Your yearly salary will be $50,000 per year for the first two years. In year 3, your salary will be $60,000, and it will grow at a rate of 5% each year after that (assume that salaries will be paid at the end of each year). You expect that as a banker, you can work for 30 years, after which time you will have to retire. Given the uncertainty in the banking profession, you have decided to use a 10% discount rate for evaluating the cash flows.
If you become a Finance Professor, you will need to pursue graduate studies for 6 more years. The tuition and other expenses each year will be $18,000 per year. Assume that the first tuition/expenses will be paid today (you will make a total of six payments; each payment is made at the beginning of the year). After you finish your graduate school six years from today, it will take you two more years to find a job as a Professor (i.e., you will get the job at the end of year 8). You expect to work for 40 years as a Professor. Your starting salary will be $55,000, and it will grow at a rate of 3% per year (assume that salaries will be paid at the end of each year). Given the less uncertainty of academia, you have decided to use a 5% discount rate for this profession for evaluating the cash flows. What profession should you choose?