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 $10954 per year. He expects that these expenses will rise by $1423 per year while he is in college. Barry estimates it will take him 4 years to graduate. With his degree, he expects to make an extra $26073 in income per year which will increase by 3% per year. He plans to work for 44 years. What is the present worth of his degree? Use an interest rate of 7% compounded annually. Note: For the sake of simplicity, though Barry would probably graduate in June, we will not begin counting the additional income until his first full year of work. This will be the next year on the CFD, immediately after his last year of college expenses. For example, if he finishes college in 3 years, his first year for earning additional income will occur in year 4 on the CFD.

Explanation / Answer

The Present Value of future extra income will be $381063

The present value of his expenses for 5 years (4+1) will be $55795

The Worth of his Graduation will be 381063-55795 = $325268

Workings

Inflow Year Extra Income PVF @ 7% PV of Cash flow 6 26073 0.666342224 17373.5408 7 26855.19 0.622749742 16724.06264 8 27660.8457 0.582009105 16098.86404 9 28490.67107 0.543933743 15497.03734 10 29345.3912 0.508349292 14917.70885 11 30225.75294 0.475092796 14360.03749 12 31132.52553 0.444011959 13823.21366 13 32066.50129 0.414964448 13306.458 14 33028.49633 0.387817241 12809.02032 15 34019.35122 0.36244602 12330.17844 16 35039.93176 0.338734598 11869.23719 17 36091.12971 0.31657439 11425.52739 18 37173.8636 0.295863916 10998.40487 19 38289.07951 0.276508333 10587.24955 20 39437.7519 0.258419003 10191.46452 21 40620.88445 0.241513087 9810.47519 22 41839.51099 0.225713165 9443.728454 23 43094.69632 0.210946883 9090.691877 24 44387.53721 0.19714662 8750.852928 25 45719.16332 0.184249178 8423.718239 26 47090.73822 0.172195493 8108.812884 27 48503.46037 0.160930367 7805.679692 28 49958.56418 0.150402212 7513.878582 29 51457.3211 0.140562815 7232.985925 30 53001.04074 0.131367117 6962.593928 31 54591.07196 0.122773007 6702.310043 32 56228.80412 0.114741128 6451.756396 33 57915.66824 0.107234699 6210.569241 34 59653.13829 0.100219345 5978.398429 35 61442.73244 0.093662939 5754.906898 36 63286.01441 0.087535457 5539.770192 37 65184.59484 0.081808838 5332.675979 38 67140.13269 0.076456858 5133.323606 39 69154.33667 0.071455008 4941.423658 40 71228.96677 0.066780381 4756.69754 41 73365.83577 0.062411571 4578.877071 42 75566.81085 0.058328571 4407.704097 43 77833.81517 0.054512683 4242.930112 44 80168.82963 0.050946433 4084.315902 45 82573.89452 0.047613489 3931.631195 46 85051.11135 0.044498588 3784.654328 47 87602.64469 0.041587465 3643.171924 48 90230.72403 0.03886679 3506.978581 49 92937.64575 0.036324103 3375.876578 50 95725.77513 0.033947759 3249.675584 381063.0702

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