Barry is a freshman at Hollyhock University. He estimates that the cost of tuiti

Question

Barry is a freshman at Hollyhock University. He estimates that the cost of tuition, books, room, board, transportation, and everyday living expenses will be $10380 per year. He expects that these expenses will rise by $1684 per year while he is in college. Barry estimates it will take him 6 years to graduate. With his degree, he expects to make an extra $38288 in income per year which will increase by 2% per year. He plans to work for 41 years. What is the present worth of his degree? Use an interest rate of 7% compounded annually.

Explanation / Answer

Living expenses, board and books etc. expenses per year $     10,380 Every year expense increase by $1,684 For 6 years net cash outflow would be as under: From 7th year he expects to earn $38,288 which increase by 2% per year from 8th year onwards to 41 year.                 1                    2                     3                  4                     5                   6 7th year 8th year to 41 years Expenses 10380 12064 13748 15432 17116 18800 Cash inflow $        38,288 Income of last year*1.02 Present value @ 12% interest compoundly 1.12 1.2544 $        1.4049 $     1.1574 $        2.2107 $      3.1060 Present value $ 9,267.86 $    9,617.35 $     9,785.75 $13,333.89 $     7,742.34 $   6,052.80 Present value of cash inflow from 8th year to 41 years Cash flow Future value of compound interest @ 7% Present value of cash inflow 1 -10380 1.070000 $         (9,701) 2 -12064 1.144900 $       (10,537) 3 -13748 1.225043 $       (11,222) 4 -15432 1.310796 $       (11,773) 5 -17116 1.402552 $       (12,203) 6 -18800 1.500730 $       (12,527) 7 38288 1.605781 $        23,844 8 39053.76 1.718186 $        22,730 9 39834.835 1.838459 $        21,668 10 40631.532 1.967151 $        20,655 11 41444.163 2.104852 $        19,690 12 42273.046 2.252192 $        18,770 13 43118.507 2.409845 $        17,893 14 43980.877 2.578534 $        17,057 15 44860.494 2.759032 $        16,260 16 45757.704 2.952164 $        15,500 17 46672.858 3.158815 $        14,775 18 47606.316 3.379932 $        14,085 19 48558.442 3.616528 $        13,427 20 49529.611 3.869684 $        12,799 21 50520.203 4.140562 $        12,201 22 51530.607 4.430402 $        11,631 23 52561.219 4.740530 $        11,088 24 53612.443 5.072367 $        10,570 25 54684.692 5.427433 $        10,076 26 55778.386 5.807353 $          9,605 27 56893.954 6.213868 $          9,156 28 58031.833 6.648838 $          8,728 29 59192.47 7.114257 $          8,320 30 60376.319 7.612255 $          7,931 31 61583.845 8.145113 $          7,561 32 62815.522 8.715271 $          7,208 33 64071.833 9.325340 $          6,871 34 65353.269 9.978114 $          6,550 35 66660.335 10.676581 $          6,244 36 67993.542 11.423942 $          5,952 37 69353.412 12.223618 $          5,674 38 70740.481 13.079271 $          5,409 39 72155.29 13.994820 $          5,156 40 73598.396 14.974458 $          4,915 41 75070.364 16.022670 $          4,685 Total present value of cash inflow $      346,715 The present value of cash flow @ 7% compound interest is $346,715.

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