By January 1st, 2020, Sam will be 45. She already has a Bachelor of Arts degree in finance. She had obtained that degree when she was 22. Ever since then, she has been working at a local subsidiary of a multinational oil and gas company. Given her job experience and interests, she is thinking about attending graduate school for a Master of Science degree in accountancy. Consider the details below:
· This graduate program takes two full calendar year, starting from early January 2020 and ending by late December 2021.
· During these two years, she continues to work at her current job, earning a net annual salary of $40,000.
· Provided that she graduates successfully, she will be promoted to a new position at the same firm. She will be earning a net salary of $47,500 in that case; an 18.75% increase in earning.
· She plans to stay at her job until she turns 66.
· The graduate program costs $75,000 per year ($150,000 in total).
· She plans to pay $50,000 at the beginning of the program using some funds that were made available to her through previous family savings. She plans to finance the remainder ($100,000) through student loan.
· The student loan will be paid back in 5 equal installments during 5 years after her graduation. There is also an interest payment of $3,000 per year that should be paid along with the above installments during the window of time when she services her debt (5 years). Like the initial payment of $50,000, all installments and interest payments are paid in early January.
a) Compute the present value of the cost of this human capital investment assuming a discount rate of 15%; i.e., r=0.15. Provide details of your computation; e.g., a screenshot of your work in Excel or details of your computation by hand. (10 points)
b) Assuming that the benefit of this investment in measured by the post-graduation earning streams, compute the present value of the benefits using the same discount rate (15%). Provide details of your computation; e.g., a screenshot of your work in Excel or details of your computation by hand. (10 points)
c) Considering your answers to parts a and b, compute the net present value of this investment. Does it make sense for Sam to invest in graduate studies? (5 points)
d) Let us assume that, unlike part b, the benefits are only measured by post-graduation wage premium: $7,500 per year. Compute the present value of the benefits using the same discount rate (15%). Provide details of your computation; e.g., a screenshot of your work in Excel or details of your computation by hand. (10 points)
e) Considering your answers to parts a and d, compute the net present value of this investment. Does it make sense for Sam to invest in graduate studies? (5 points)
f) Which one of the above assumptions about benefits make sense to you: the assumption in part b or the assumption in part d? Explain why. (10 points)
g) Identify the least amount of post-graduation wage premium that would provide same with enough incentives to undertake graduate studies. Provide details of your computation. (10 extra points).
