Question
Diane has just turned 19 and also completed high school. She is wondering about the value of a college education. She is pretty good with
Diane has just turned 19 and also completed high school. She is wondering about the value of a college education. She is pretty good with numbers, and driven by financial considerations only, so she sits down to calculate whether it is worth the large sum of money involved. She knows that her first year tuition will be $13,000, due at the beginning of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 5% per year for the 4 years she is in school. She also estimates that her living expense above and beyond tuition will be $8,000 per year (assume this occurs at the end of the year) for the first year and will increase $500 each year thereafter to keep up with inflation. She does not plan to work at all while attending school. Were she to forgo college she would be able to make $23,000 per year out of high school and expects that to grow 3% annually. With the college degree, she estimates that she will earn $47,000 per year out of college, again with annual 3% increases in salary. Either way, she plans to work until 64 (she begins college right away). The interest/discount rate is 8%. What is the NPV of her college education? (Note: All cash flows except tuition payments occur at the end of the year.)HINTThere are more than 2 cases here. All you have to do is to calculate the NPVs of these cases separately and then put them together. Case 1 is when she pays her tuition fee. Second is her living expenses, third is what happens if she forgoes college, she starts earning 23000 dollars right from year 19 and if she goes to college, she will earn 47000 dollars from year 23. Remember that the living expense is paid at the end of the year. This problem is about about putting the numbers on the correct timeline. n in every step is crucial
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