Michelle Adams is deciding on one of two career choices

| June 5, 2016

Question
Question 1

Michelle Adams is deciding on one of two career choices, before retiring in 20 year time.

Choice 1
Michelle can go to a prestigious graduate school for two years and obtain a degree. Including tuition and living expenses, she expects to pay $35,000 at the end of each year for two years while at school. After graduating, she expects to land a demanding job that pays $90,000 at the end of the third year, and grows at a constant rate of 5% each year (so at the end of the fourth year she expects 90,000*1.05=$94,500 etc.) She will retire in 18 years after finishing graduate school.

Choice 2
Michelle can continue in her present job. She expects to be paid $42,000 at the end of the year, and expects her salary to increase by 10% every year, paid at the end of each year. She expects to work 20 years before retiring.

a. Suppose, Michelle’s discount rate is 12%. Which career should she choose?

b. Suppose Michelle’s discount rate is 15%. Which career should she choose?

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