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F. Naz, B.Com

Category: Multiple Problems

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Experience: have completed B.Com and CA Finalist

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1. TVM. For this and the next 2 questions: Your brother just

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1. TVM. For this and the next 2 questions: Your brother just graduated from high school and is seeking your advice as to whether he should find a job immediately or go to college for 4 years and then find a job. He estimates that if he gets a job immediately, he will earn $15,000 per year for the next 40 years. If he goes to college first, he estimates that he can earn $30,000 for each of the 36 years after he graduates (for simplicity, assume zero growth in income. Also, whether or not he goes to college, he plans to retire 40 years from today.) He also estimates that the 4 years of college will cost him $8,000 per year. Assume that his time value of money is 14%. (If he goes to college first, he can also borrow money at 14%). Assume that all cash flows occur at the end of each period. What is the present value of his cash flows if he gets the job immediately?

2. What is the present value of his cash flows if he goes to college first, foregoing the opportunity to earn an income in the next 4 years?

3. Suppose your brother’s chances of getting a job in the next 4 years are at best doubtful; in which case, you should assume that he will be unemployed during this period. What is the PV of his cash flows if he goes to college first?