Question

Megan has just finished high school and is about to decide which type of education to get. She has narrowed down her options to two alternatives. She can either become an artist or an accountant. Suppose that Megan lives 2 periods. In the first, she gets and education. In the second, she works in the labor market. If Megan becomes an accountant, she will spend $15,000 on tuition and books. She will then earn $53,800 in the second period. If she becomes an artist, it will cost her $5,000 in the first period and she will earn $42,000 in the second period. Suppose that the interest rate, r, is 10 percent. Which career will Megan pursue

Answer 1

Become Accountant as the NPV is more.

Step-by-step explanation:

As for the information provided:

There are two alternatives:

Provided interest rate = 10%

Discounting factor period 1 = 0.909

Period 2 = 0.826

Now, the options are

1 Become accountant

Outflow = $15,000 in period 1 = $15,000
`*` 0.909 = $13,635

Inflow = $53,800 in period 2 = $53,800
`*` 0.826 = $44,438.8

Net Present Value = $44,438.80 - $13,635 = $30,803.80

2 Become artist

Outflow = $5,000 in period 1 = $5,000
`*` 0.909 = $4,545

Inflow = $42,000 in period 2 = $42,000
`*` 0.826 = $34,692

Net Present Value = $34,692 - $4,545 = $30,147

Since NPV is more of accountant it shall be chosen.

Note: since not provided assumed the cash flows incur at end of the year.