Question

12 More fun with IRR. Refer to Table 5.3 about the payouts available at different jobs. Find the IRR for becoming an ophthalmologist as opposed to a professional sports star. Compare your result with the IRR from the previous exercise and interpret this difference in terms of the concept of patience. a

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Answer 1

We take the information from the table as

	Period 0	Period 1	Period 2	Period 3
Ophthalmologist	-5	1	10	12

If you calculate IRR for the same by using the formula

= -5 + 1/(1+r) +10/(1+r)² +12/(1+r)³  

^{IRR = 91%}

^{And the other table shows}

	Period 0	Period 1	Period 2	Period 3
Sports super star	15	0	0	0

This return is only during the first year and not in the rest of the year. So what ever he is getting in on his first year.

So, if we consider the sport star option is 100% and the other one is 91%.

I would prefer the sports super star option compared to first one because I can invest the earnings of the salary in many good options as there is no substantial benefit from the first option.