Question Details

Accounting Homework Help

I have already solved the first 3 out of 4 questions, but I needhelp solving the 4th question. I have provided the answers to helpanswer the 4th question. Please help!

TVM. For this and the next 3 questions: Your brother justgraduated from high school and is seeking your advice as to whetherhe should find a job immediately or go to college for 4 years andthen find a job afterward. He estimates that if he gets a jobimmediately, he will earn $15,000 per year for the next 40 years.If he goes to college first, he estimates that he can earn $30,000for each of the 36 years after he graduates. Whether or not he goesto college, he plans to retire 40 years from today. For simplicity,assume zero growth in income. He estimates that the 4 years ofcollege will cost him $8,000 per year. Assume a discount rate of14% (also, assume that he goes to college first, he could alsoborrow money at 14%). Assume that all cash flows occur at the endof each period.

1) What is the present value of his cash flows if he gets a jobimmediately? PV = $106,575.61

2)What is the present value of his cash flows if he goes tocollege first, foregoing therefore the opportunity to earn anincome in the next 4 years? PV = $58,724.48

3) Suppose your brother’s chances of getting any job in the next4 years are at best doubtful. In this case, you should assume thathe will be unemployed during this period. What then is the PV ofhis cash flows if he goes to college first? PV = $102,430.16

4) Now assume income growth rate of 5%. Again, first year incomeif no college is $15,000. This amount will then grow at 5% peryear. Similarly, first year income after graduating from college is$30,000, which will then grow at 5% per year. College cost of$8,000 is the same per year. Given this revised information, whatis the present value of the cash flows if this individual choosesto go to college first, thus foregoing the opportunity to earn anyincome in the next 4 years?
a. $125,739.86
b. $58,724.48
c. $82,034.17
d. $102,430.16
e. $115,802.33
f. None of the above
Hint: On spreadsheet, grow both sets of incomes by 5% per year.Then use NPV function to find PV.