Determine present values of income streams from her options

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Suppose a friend is just about to graduate from college and is considering a career in law. In order to make her decision, she must determine the present values of income streams from her options and pursue the income stream with the highest net present value (NPV). She assumes that her cost to borrow is 6% and she will use a discount rate of 2 % for her initial calculations. Option 1: If she does not go to law school and immediately goes to work, she believes she can earn a salary of $42,000 per year to start. She expects that she will receive incremental increases in her salary of 10% after her first 5 years of employment and then incremental increases averaging 5% every 5 years to retirement. She expects to have a career of 40 years in the work force. Option 2: If she goes to law school, she will spend 2 years studying full time and pay tuition of $25,000 per year. She will borrow the entire cost of her law degree and pay it back upon graduation in one lump sum. She will work part time during law school and expects to earn $10,000 per year. When she graduates, she will be able to earn a starting salary of $52,000 per year. She expects to receive incremental increases in her salary of 4% every 5 years to retirement. She anticipates a 35 year career in law. What decision should she make? Would your advice be the same if the cost to borrow were 10% and she used a 5% discount rate? Explain your conclusions and how you arrived at them (show your work).

Reference no: EM131584308

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