Question

Your younger sister has come to you for career advice as she is about to enter university, and there are two options open for her. Her first option is to study engineering. If she does this, here undergraduate degree would cost her $15,000 per year for four years. Having obtained here undergraduate degree, she would then need to gain two years of job related experience (like and internship). During this time, she would earn $20,000 in the first year, and $25,000 in the seconde year. She would then need to obtain a master's degree which will cost $20,000 a year for two years. After the completion of her Master's degree, she will be a fully qualified engineer, and ite will take her one year to find a job. Once she finds the job, she will earn $40,000 per year for 254 years with zero growth. Her other option is to study Finance. If she does this, she would pay $15,000 a year for four years. After the completion of her degree, she will find a job right away. She will start with a yearly salary of $35,000, and her salary will increase by 1% per year. She expects to work for 30 years. All earnings and costs are paid at the end of the year. What advice would you give her if the discount rate is 10% per year?!

Answer 1

Solution Given discount rate 10% Year 1 11 15 Engineering Cash Flow PVF P V Cash Flow -15000 0.909 -13636.361 - 15000 - 15000 0.826 -12396.691 - 15000 -15000 0.751 -11269.721 - 15000 -15000 0.683 -10245.20 -15000 20000 0.621 12418.43 35000.00 25000 0.564 14111.85 35350.00 -20000 0.513 -10263.16 35703.50 -20000 0.467 -9330.15 36060.54 0.424 0.00 36421.14 40000 0.386 15421.73 36785.35 40000 0.350 14019.76 37153.21 40000 0.319 12745.23 37524.74 40000 0.290 11586.58 37899.98 40000 0.263 10533.25 38278.98 40000 0.2391 9575.68 38661.77 40000 0.218 8705.17 39048.39 400001 0.198| 7913.79| 39438.88 40000 0.1801 7194.35| 39833.26 40000 0.164 6540.32 40231.60 40000 0.1491 5945.75 40633.91 40000 0.135 5405.22 41040.25 40000 0.123 4913.84 41450.66 40000 0.112 4467.13| 41865.16 40000 0.102 4061.021 42283.81 40000 0.0921 3691.841 42706.65 40000 0.084 3356.22 43133.72 40000 0.0761 3051.11 43565.06 40000 0.069 2773.73| 44000.71 40000 0.063 2521.58 44440.71 40000 0.0571 2292.34 44885.12 40000 0.0521 2083.95| 45333.97 40000 0.0471 | 1894.50 45787.31 40000 0.043 1722.27) 46245.18 40000 0.039| 1565.70 46707.64 Present Value 113371.03 Finance PVF P V 0.909 -13636.36 0.826 -12396.69 0.751 -11269.72 0.683 -10245.20 0.621| 21732.25 0.564 19954.15 0.513 18321.54 0.467 16822.51 0.424 15446.12 0.386 14182.35 0.350 13021.97 0.319 11956.54 0.290 10978.28 0.263 10080.05 0.239| 9255.32 0.218| 8498.07 0.1987802.77 0.180| 7164.36 0.164 6578.19 0.1496039.97 0.135) 5545.79 0.123 5092.05 0.112 4675.42 0.102| 4292.89 0.092 3941.65 0.084 3619.15 0.076 3323.04 0.0691 3051.16 0.0631 2801.52 0.057 2572.30 0.0521 2361.84 0.047 2168.60 0.043| 1991.17 0.039| 1828.25 197551.29 26 28 33 34 (1/(1+r)^n PVE where r is discount rate and n is Number of year PV Cashflow X PVF Hence, doing Finance is better as present value of net earning (net of education expenses) is more as compared to Engineering.