A UCF graduate is getting a masters degree at night. The graduate expects to rec

Question

A UCF graduate is getting a masters degree
at night. The graduate expects to receive
an annual salary of $6,000 per year more as a
result of getting a masters degree. The graduate
plans to work for 40 years, so he/she will earn
$240,000 more in their lifetime ($6,000 x 40 years).

What is the present value of a stream of
$6,000 payments for 40 years based on an
annual interest rate of 7%? Assume the $6,000
is paid annually at the END of the year.

By the way, if it costs say $25,000 today to
get a masters degree, do you think a graduate
degree is a smart economic move if your salary
goes up by $6,000 per year?


I got $79,990 for the first part. Not sure if it is correct. I don't know the answer at all for the second part of the question though.

Explanation / Answer

Yes, 79,990 is correct (plugged in calculator n = 40, i = 7%, payment = 6000, end of year and solved for payment and got 79990) THe masters degree is a smart move in this situation because the present value of the increase in salary is 79,990 which is a lot more than the present value of the cost of the master degree. However, in a different situation - like you only had a couple of years to work before retiring, then it wouldn't be a smart economic move. So it really depends on how many years you plan to work after getting the degree, and according to my calculations, you would need to work a little over 5 years for it to have been worth it economically.

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