Sally is trying to select the best option for her to follow in the future. Her t
ID: 2697700 • Letter: S
Question
Sally is trying to select the best option for her to follow in the future. Her two options are 1) start working full-time right after high school or 2) work part-time while attending college full-time.
The cost that Sally would have to pay for each option today would be $47,120 to start working right after college (some training and certificates were needed) or $50,000 to attend college. The cash flows for each option are as follows:
Annual Cash inflows
Work after High School
Attend College
Year 1
10,000
2,000
Year 2
10,000
2,000
Year 3
10,000
2,000
Year 4
10,000
2,000
Year 5
10,000
40,000
Year 6
10,000
50,000
Year 7
10,000
60,000
Assuming a cost of capital of 8% and cash received at the end of each period, calculate the following items and state which option would be best for each item:
a. Payback Period
b. Net Present Value
c. Internal Rate of Return:
a. For the “Work after high school†option, come up with the actual Internal Rate or return.
b. For the “Attend College†option, figure out the two nearest whole rates that are the closest to the actual internal rate of return, ex: if the cost of capital is 8% and the NPV is positive, you would test different interest rates above 8%, like 10%, 11%, etc. until the net present value turns negative.
d. Which option do you suggest Sally take given the above calculations? Please explain.
Annual Cash inflows
Work after High School
Attend College
Year 1
10,000
2,000
Year 2
10,000
2,000
Year 3
10,000
2,000
Year 4
10,000
2,000
Year 5
10,000
40,000
Year 6
10,000
50,000
Year 7
10,000
60,000
Explanation / Answer
for working after high school,
payback period = 4+(7120/10000) = 4.712 years
for college part time
payback period = 5+(2000/50000) = 5.04 years
B)
for working high school
NPV = -47120+10000*PVIFA(8,7) = -47120+5.2064*10000= $4944
for college part time
NPV = -50000+2000*PVIFA(8,4)+(40000/1.08^5)+(50000/1.08^6)+(60000/1.08^7)
NPV = -50000+2000*3.3121+(40000/1.08^5)+(50000/1.08^6)+(60000/1.08^7) = $50365.43
C)
for working high school
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