Personal Investment Analysis (CP10-2) A Masters of Accountancy degree at Central

Question

Personal Investment Analysis (CP10-2)

A Masters of Accountancy degree at Central University costs $12,000 for an additional fifth year of education beyond the bachelor's degree. Assume that all tuition is paid at the beginning of the year. A student considering this investment must evaluate the present value of cash flows from possessing a graduate degree versus holding only the undergraduate degree. Assume that the average student with an undergraduate degree is expected to earn an annual salary of $50,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters of Accountancy degree is expected to earn an annual salary of $66,000 per year (assumed to be paid at the end of the year) for nine years after graduation. Assume a minimum rate of return of 10%.

·  Calculate the net present value of cash flows from an undergraduate degree. Use the present value table provided in this chapter in Exhibit 5 or look up Net Present Value tables on the internet

·  Determine the net present value of cash flows from a Masters of Accountancy degree, assuming no salary is earned during the graduate year of schooling.

·  What is the net advantage or disadvantage of pursuing a graduate degree under these assumptions?

Explanation / Answer

NPV of undergraduate level = -X + $50,000 * (Present value annuity factor for 10 years at 10%)

= -X + $50,000 * 6.144 = -X + 307,228.

NPV of Graduate level;

= -x -12000 + 66,000 (Present value annuity factor for 10 years at 10%)
= -X -12000 + 66000* 6.144

= -X - 12000 + 405,541

= -X + 393,541.

NPV of graduate level is greater than the undergraduate level and thus, it is preferred to persue graduate level.

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