With one year of study,Rob Sanchez can earn a master's degree,which will cost him $15,000 in tuition and $20,000 in lost wages.The degree will increase his yearly income by $20,000 per year for three years after receiving the degree.The interest rate is 10 percent (0.10)per year.What should Rob do? (Assume that costs are incurred and income is received at the end of the year. )

Question

Quizplus · Accepted Answer

To make the best decision, we need to compare the present value of the costs to the present value of the benefits. If the benefits outweigh the costs, Rob should obtain the degree. We can use the formula: 
PV = FV / (1+r)^n

where PV = present value, FV = future value, r = interest rate, and n = number of years.

The present value of the costs is: 
PV(costs) = 15,000 + 20,000 / (1+0.10)^1 = 32,727

The present value of the benefits is: 
PV(benefits) = 20,000 / (1+0.10)^1 + 20,000 / (1+0.10)^2 + 20,000 / (1+0.10)^3 = 49,752

Subtracting the present value of the costs from the present value of the benefits gives us:

PV(benefits) - PV(costs) = 49,752 - 32,727 = 17,025

Since the result is positive, Rob should obtain the degree as the benefits are worth more than the costs.

With One Year of Study,Rob Sanchez Can Earn a Master's