Question

Net Present Value of Lifetime Earnings

Option #1 Start work immediately, earning $50,000 in period 1 Earning $52,500 in period 2 Earning $45,000 in period 3 Option #2 Spend $10,000 to attend a post graduate certificate program in period 1 Earning $55,000 in period 2 Earning $65,000 in period 3 Option #3 Spend $15,000 to attend a master's program in period 1 Spend $15,000 to attend a master's program in period 2 Earning $75,000 in period 3 Your discount rate is 5%. What education path maximizes your net present value of your lifetime earnings?

Answer 1

NPV, Option 1 = 50,000 x P/F(5%, 1) + 52,500 x P/F(5%, 2) + 45,000 x P/F(5%, 3)

= 50,000 x 0.9524 + 52,500 x 0.9070 + 45,000 x 0.8638

= 47,620 + 47,617.5 + 38,871

= 134,108.5

NPV, Option 2 = - 10,000 x P/F(5%, 1) + 55,000 x P/F(5%, 2) + 65,000 x P/F(5%, 3)

= - 10,000 x 0.9524 + 55,000 x 0.9070 + 65,000 x 0.8638

= - 9,524 + 49,885 + 56,147

= 96,508

NPV, Option 3 = - 15,000 x P/F(5%, 1) - 15,000 x P/F(5%, 2) + 75,000 x P/F(5%, 3)

= - 15,000 x 0.9524 - 15,000 x 0.9070 + 75,000 x 0.8638

= - 14,286 - 13,605 + 64,785

= 36,894

Since Option 1 has highest NPV, this should be selected.