Question

Cindy is considering going to law school. If she does, she will spend $70,000 on tuition and books to get a college education (during the first time period), $140,000 on tuition and books to get a law degree (during the second time period), and her law degree will earn her $700,000 during the remainder of her work-life (during the third time period). Cindy's time preference for money is associated with a per-period interest rate of 10 percent. Approximately what is Cindy's present value of obtaining a law degree

Answer 1

$346,581.52

Step-by-step explanation:

we need to use the present value formula to solve this:

present value = future value / (1 + r)ⁿ

the present value of tuition and books will be negative (since they are a cash outflow)

PV = -70,000 / (1 + 0.1) = -70,000 / 1.1 = -$63,636.36

PV = -140,000 / (1 + 0.1)² = -140,000 / 1.1² = -$115,702.48

the present value of the expected income will be positive since it represents cash inflows

PV = 700,000 / (1 + 0.1)³ = 700,000 / 1.1³ = $525,920.36

the net present value of obtaining a law degree = $525,920.36 - $63,636.36 - $115,702.48 = $346,581.52