Apply financial analysis to show that it can make financial sense to go back to

Question

Apply financial analysis to show that it can make financial sense to go back to school and get more advanced education? Provide an analysis of the tangible and intangible benefits of quitting work to go back to college or university.

Assumptions:

Imagine that a 27 year old is thinking of going back to school full-time because there is a really great two year program that will open new doors for career advancement and offer more wages and benefits over time.

Here is the relevant financial information to make your analysis. Your task is to determine which costs are relevant and should be included and under what terms it makes economic sense to go back to college:

Application fees to a range of programs at various colleges and universities a cost of $500. Is this a sunk cost or should it be included in the financial analysis?

Admission exams written over the last few years at a cost of $500. Is this a sunk cost or should it be included in the financial analysis?

New computer and software required for program at $1,000 (one – time cost).

Textbooks to take required courses $500 per year.

Quit job currently paying $30,000 per year.

Annual living expenses $20,000 per year, and this amount is the same not matter if the 27-year old is working or going to school.

Tuition fees of $5,000 per year.

Accreditation exam upon program completion of $1,000.

Expected additional income of $10,000 per year (this equates to $40,000 per year) growing at 2% in real terms per year until retirement.

Cost of personal loan at 5%

Cost of student loan at 2%

Horizon : working until 65 years of age.

The first requirement is to offer one recommendation to solve the challengeof whether it pays to go back to school. This should be completed in two pages and this can be either a Word or Excel report.

The second requirement is to fully examine both the tangible and intangible benefits.

Explanation / Answer

Tangable benefits: increase in salary.

Intangable benefits:

1. New courses will give a new Degree.

2. Improved life style due to increased salary.

Sunk cost is such cost which has been incurred before and on such expenses you have nothing to do. So Application fees are not sunk cost and should be considered in analysis. Similar is the Admission exams. One time Cost: Aplication fees 500 Admission Exams 500 New Computer 1000 Total One time cost 2000 One time cost has to be paid before course starts. Text Books 500 Tution fees 5000 Annual Cost 5500 Total Cost for School = 2 x 5500 + 2000 = 13000 Interest on student loan per year = 13000 x 2% = 260 Annual Leaving Expenses 20000 Annual Interest cost 2000 Total Leaving Cost 22000 Course cost per year = 5500+260+20000+2000 = 27760 Cash Incremental Net Cash Pv factor Present Year Outflows Exam cost Cashflows Flows at 5% Value 0 -2000 -2000 1 -2000.00 1 -27760 -27760 0.952381 -26438.10 2 -27760 -1000 -28760 0.907029 -26086.17 3 10000 10000 0.863838 8638.38 4 10200.00 10200 0.822702 8391.57 5 10404.00 10404 0.783526 8151.81 6 10612.08 10612.08 0.746215 7918.90 7 10824.32 10824.3216 0.710681 7692.64 8 11040.81 11040.80803 0.676839 7472.85 9 11261.62 11261.62419 0.644609 7259.34 10 11486.86 11486.85668 0.613913 7051.93 11 11716.59 11716.59381 0.584679 6850.45 12 11950.93 11950.92569 0.556837 6654.72 13 12189.94 12189.9442 0.530321 6464.59 14 12433.74 12433.74308 0.505068 6279.89 15 12682.42 12682.41795 0.481017 6100.46 16 12936.07 12936.0663 0.458112 5926.16 17 13194.79 13194.78763 0.436297 5756.84 18 13458.68 13458.68338 0.415521 5592.36 19 13727.86 13727.85705 0.395734 5432.58 20 14002.41 14002.41419 0.376889 5277.36 21 14282.46 14282.46248 0.358942 5126.58 22 14568.11 14568.11173 0.34185 4980.11 23 14859.47 14859.47396 0.325571 4837.82 24 15156.66 15156.66344 0.310068 4699.59 25 15459.80 15459.79671 0.295303 4565.32 26 15768.99 15768.99264 0.281241 4434.88 27 16084.37 16084.37249 0.267848 4308.17 28 16406.06 16406.05994 0.255094 4185.08 29 16734.18 16734.18114 0.242946 4065.51 30 17068.86 17068.86477 0.231377 3949.35 31 17410.24 17410.24206 0.220359 3836.51 32 17758.45 17758.4469 0.209866 3726.90 33 18113.62 18113.61584 0.199873 3620.41 34 18475.89 18475.88816 0.190355 3516.97 35 18845.41 18845.40592 0.18129 3416.49 36 19222.31 19222.31404 0.172657 3318.88 37 19606.76 19606.76032 0.164436 3224.05 Total -57520 -1000 499944.78 441424.78 138201.19 Present Value = 138,201.19. Hence he should go to school.

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