(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either g
Posted: Sun May 08, 2022 10:10 am
(Comprehensive Problem) 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 $45,000 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 43 years. As a law student, you will be paying $30,000 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
$70,000 per year. Moreover, you expect your salary to grow
by 8 percent per year until you retire 36 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 $30,000 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 $141,000 in lost income over the three years of
law school: $45,000 the first year, $47,250 the
second year, and $49,613 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 11
percent.
a. What is the present value of the future earnings that you
will realize by going directly to work, assuming a discount
rate of 11 percent?
b. What is the present value today of your future
earnings if you decide to attend law school, assuming a
discount rate of 11 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 11 percent?
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 $45,000 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 43 years. As a law student, you will be paying $30,000 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
$70,000 per year. Moreover, you expect your salary to grow
by 8 percent per year until you retire 36 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 $30,000 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 $141,000 in lost income over the three years of
law school: $45,000 the first year, $47,250 the
second year, and $49,613 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 11
percent.
a. What is the present value of the future earnings that you
will realize by going directly to work, assuming a discount
rate of 11 percent?
b. What is the present value today of your future
earnings if you decide to attend law school, assuming a
discount rate of 11 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 11 percent?