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1. Consider a college graduate aged 22 deciding whether to become a G.P. Retirement is at age 62. All dollar figures given below are given
1. Consider a college graduate aged 22 deciding whether to become a G.P. Retirement is at age 62. All dollar figures given below are given in real dollars. If she becomes a G.P. then annual income is -$20,000 (the cost of Med school) for each of years 1 to 4; $40,000 for each of years 5 to 8 (resident's income) and $120,000 for each of years 9 to 40. Alternatively she can immediately get a job, beginning at $30,000 in year 1 and rising by $1,000 each year to $69,000 in year 40. (a) Give the difference in income (G.P. income - non-G.P. income) in years 1-10 and in year 40. (b) Show that without discounting total lifetime income as a G.P. will be $1,940,000 higher than if she is not a G.P. (c) Now consider discounting. The present discounted value of the investment in G.P. training compared to no training is PDV = Y1/(1+r) + Yo(1+r) + ....+ Y40/(1+r)" where Y1 is net return in year 1 (here -$20,000 - $30,000 = -$50,000), Y2 is net return in year 2 (here $51,000 and so on). The PDV varies with the discount rate. It can be shown that Discount rate r 00 05 10 .15 20 PDV 1,940,000 584,959 174,176 24.192 -37.450 What approximately is the internal rate of return to investing in training to become a G.P.? (The internal rate of return is that discount rate for which an investment just breaks even.) (d) Optional. Use a spreadsheet such as Excel to calculate the PDV's in part c
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