Bradley figures the he will have to pay $30,000 per year tuition in October 2014

Question

Bradley figures the he will have to pay $30,000 per year tuition in October 2014 and then again in October 2015.

Assume that Bradley requires a rate of return on his investment of 8% per annum and that his first salary increase resulting from his degree will take place in October 2016. Also assume that Bradley expects a 2.5% annual increase in his salary throughout his career and that he will receive thirty-six annual paychecks after graduation, the first of which will be in October 2016.

By how much must Bradley

Explanation / Answer

Let increase in Oct 2016 be $ X.

So present value of the 36 period annuities as of October 2015 = X * (1-1.025^36/1.08^36) / (8%-2.5%) = 15.412*X

Present value as of Oct 2014 = 15.412 * X / 1.08 = 14.27*X

Present value of the tuition payments = 30,000+30,000/1.08 = 57,777.78

Equating the 2, we get 14.27*X = 57,777.78

Solving, we get X = 4,048.78

So Bradley's salary should increase by atleast $4,048.78 in Oct 2016 to justify his outlays on tuition.

Hope this helped ! Let me know in case of any queries.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.