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present value

Brian and Allen are 30 years old with identical academic records and job
history. Both currently have jobs paying $40,000 per year. The only difference between Brian and Allen is their credit score. Allen's credit score is high and he can borrow money at 5%. Unfortunately, Brian's credit score is not very good and banks are only willing to loan him money at a 10% interest rate.

They are considering attending business school, which takes 3 years to complete. Because of the time required to successfully complete the program, students are not able to work more than a few hours per week.

Assume that the annual tuition is $20,000 each year and living costs are additional $20,000 per year, thus each would need to borrow $40,000 a year for the next three years to complete school. After graduation, each brother's annual earnings are expected to increase by $25,000 per year for the next 30 years.

Compare the (net) present value of the financial costs and benefits for Allen and for Brian of attending business school plus an additional 30 years of work, assuming the cost of borrowing given above is used in the calculations for each brother.

Solution Summary

Compare the (net) present value of the financial costs and benefits.