Reference no: EM132177182
Sally has a decision to make about what she will do in the next 2 years. She can go to school or go straight into the workforce. If Sally immediately starts working, she will earn $20,000 in both years 1 and 2. If she goes to school in year 1, she must pay $5,000, but she would earn $47,500 in year 2. If the interest rate is 5%, calculate the present value for Sally if she goes to school and if she does not. Does the investment in school make sense? Does it make sense if the interest rate is 6% or 4%?
Present value at 5% interest
School: 42,500 / (1+.05)2 = $38548.75
Work: 40,000 / (1+.05)2 = $36281.18
Present value at 6% interest
School: 42,500 / (1+.06)2 = $37824.85
Work: 40,000 / (1+.06)2 = $35599.86
Present value at 4% interest
School: 42,500 / (1+.04)2 = $39293.64
Work: 40,000 / (1+.04)2 = $36982.25
Investment in school makes sense at 4%, 5%, and 6% interest. Difference in interest rate did not matter that the investment in school is makes sense.
This is my work, but I don't know how to set up the equation when the first year in school is -$5000, but +47500 in school for second year. I don't think my answers are correct. The topic is on present value of money PV = (Money) / (1 + (interest rate))^(Number of years). Could you please check if I did right.