(Solving a 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 opportunities are as follows:

• If you take the “get a job” route, you expect to start off with a salary of $40,000 per year. There is no way to predict what will happen in the future, but your best guess is that your salary will grow at 5 percent per year until you retire in 40 years.

• As a law student, you will be paying $25,000 per year in tuition for each of the three 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 7 percent per year until you retire 35 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 $25,000 in tuition at the beginning of each of the three years of law school. In addition, you will be giving up a little more than $126,000 in lost income over the three years of law school: $40,000 the first year, $42,000 the second year, and $44,100 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, assuming a 3 percent discount rate.

b. What is the present value of your future earnings if you decide to attend law school, assuming a 3 percent discount rate? Remember that you will be in law school for three years before you start to work as a lawyer. (Hint: Assume you are paid at the end of each year, so that if you decide to go to law school, your first salary payment occurs four 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 3 percent discount rate?