11.Suppose you have just graduated from college and are deciding on a career. Your four career options, along with your salary in each of the four earning periods, are displayed in Table 5.3. Assume that any career will only last four periods before retirement.

Table 5.3: Career options and salary information for Exercise 11

Salary

Occupation

Period 0

Period 1

Period 2

Period 3

Ophthalmologist

-5 Period 0

1 Period 1

10 Period 2

12 Period 3

Accountant

2 Period 0

3 Period 1

4 Period 2

5 Period 3

Starving artist

1 Period 0

1 Period 1

1 Period 2

1 Period 3

Sports superstar

15 Period 0

0 Period 1

0 Period 2

0 Period 3

(a)Assume your discount factor = 0.95. Interpret this assumption

(b)Find the value of the interest rate r that corresponds to your discount factor.

(c)Assuming = 0.95, calculate the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Which career do you prefer?

(d)Will the internal rate of return (IRR) for becoming an ophthalmologist as opposed to an accountant be greater or less than your answer to Exercise 11(b)?

(e)Now assume = 0.6. Calculate both the corresponding interest rate and the net present value (NPV) of becoming an ophthalmologist and of becoming an accountant. Now which job do you prefer?

12. Refer to the table in Exercise 11 about the payouts available at different jobs.

(d)Does the NPV of salaries in the various professions tell you everything you need to know about picking a career? What does this calculation leave out?