Purely on the basis of financial considerations, calculate the present value of

Question

Purely on the basis of financial considerations, calculate the present value of a graduate (Masters) degree from ITU. You may assume the following:                       (15)

a.   It takes 2 full years (6 trimesters) for completion of the degree program.

b.   You may assume any representative rate of tuition per unit that doesn’t change for the 2 years duration. You can assume that you can borrow money for the tuition at the rate of 8% p.a.

c.   You may consider (for the present value calculations purpose) 3 years of full time job at some representative annual salary (you can use annual salary for calculation instead of monthly.) – received at the end of 3rd, 4th and 5th years.

d.   Assume the discounting rate to be the same as rate of borrowing (8%).

Explanation / Answer

Assumptions:

b) Tuition fee of $200 per trimester payable at the beginning of each trimester.

c) Annual salary of $2000 per year received at the and of the 3rd, 4th and 5th year.

NPV = PV of Cash inflows - PV of cash outflows

Since fees are payable every four months, compounding every four months is assumed,

PV of cash inflows = 2000/(1+.08/3)^15 + 2000/(1+.08/3)^12 + 2000/(1+.08/3)^9 = $4384.29

PV of cash outflows is in the form of an annuity due, annuity being the quarterly fee of $200, i being 0.08/3 and n being 6.

PV = 200{(1+0.08/3)^6 -1)*(1+0.08/3)}/{0.08/3*(1+0.08/3)^6} = 200*0.1711*1.0267/0.0267*1.1711= $1123.62

NPV of the Master's degree from ITU = 4384.29 - 1123.62 = $3,260.67

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

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