Answer:
Annual benefit from college education (Increase in earnings) = $50,000 - $20,000 = $30,000
<em>Assuming 4 years of college study period</em>
<u>The net present value of a college education if the interest rate is 10% is as follows</u><u>:</u>
Net present value = PV of benefits - PV of costs
Net present value = Annual benefit*P/A(10%,4) - Annual costs of attending college*P/A(10%,4)
Net present value = 30,000 * P/A(10%,4) - 20,000 * P/A(10%,4)
Net present value = (30,000 - 20,000) * P/A(10%,4)
Net present value = 10,000 * P/A(10%,4)
Net present value = 10,000 * 3.1699
Net present value = $31,699
<u>How does this change if the interest rate is 15%?</u>
Net present value = 30,000 * P/A(15%,4) - 20,000 * P/A(15%,4)
Net present value = (30,000 - 20,000) * P/A(15%,4)
Net present value = 10,000 * 2.855
Net present value = $28,550
