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Problem 13: Discounting costs and benefits You are currently 40 years old (imagine that!) and you expect to work another 25 years before retirement. In

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Problem 13: Discounting costs and benefits You are currently 40 years old (imagine that!) and you expect to work another 25 years before retirement. In your job as a public policy analyst, you are earning $40,000 a year and, unless you take steps to change that, you expect to continue earning that same amount in real terms for the rest of your working career. This is a problem, because while you do have a little savings put aside, just $5,000 in a savings account earning 5% a year nominal interest, you also owe $23,000 on credit cards (you have great credit, as a policy analyst) on which you are paying 18% a year nominal interest. The rate of inflation is just 2%. Your boss suggests the following option: take a course in benefit-cost analysis at the SPP and she will raise your pay to $15,000 a year. The course will cost you $5,000 tuition up front, plus you will have to miss work without pay for 6 months starting 6 months from now. Your salary would go up starting a year from now. (a) What is the net present value of this little project, if you decide to take on the boss' suggestion? (compared to the status quo) (b) What's the present value of your assets, liabilities and future earning and payments) Problem 13: Discounting costs and benefits You are currently 40 years old (imagine that!) and you expect to work another 25 years before retirement. In your job as a public policy analyst, you are earning $40,000 a year and, unless you take steps to change that, you expect to continue earning that same amount in real terms for the rest of your working career. This is a problem, because while you do have a little savings put aside, just $5,000 in a savings account earning 5% a year nominal interest, you also owe $23,000 on credit cards (you have great credit, as a policy analyst) on which you are paying 18% a year nominal interest. The rate of inflation is just 2%. Your boss suggests the following option: take a course in benefit-cost analysis at the SPP and she will raise your pay to $15,000 a year. The course will cost you $5,000 tuition up front, plus you will have to miss work without pay for 6 months starting 6 months from now. Your salary would go up starting a year from now. (a) What is the net present value of this little project, if you decide to take on the boss' suggestion? (compared to the status quo) (b) What's the present value of your assets, liabilities and future earning and payments)

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