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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Personal investment analysis

A Masters of Accountancy degree at Jalapeno University would cost $15,000 for an additional fifth year of education beyond the bachelor’s degree. Assume that all tuition is paid atthe beginning of the year. A student considering this investment mList evaluate the presentvalue of cash flows from possessing a graduate degree versus holding only the undergraduate degree. Assume that the average student with an undergraduate degree is expected toearn an annual salary of $50,000 per year (assumed to be paid at the end of the year) for10 years. Assume that the average student with a graduate Masters of Accountancy degreeis expected to earn an annual salary of $65,000 per ear (assumed to be paid at the end ofthe year) for nine years after graduation. Assume a minimum rate of return of 10%.

What is the net advantage or disadvantage of pursuing a graduate degree under theseassumptions?

To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Net advantage of perusing the Master degree

Explanation

The Net advantage of perusing the Master degree is calculated as follows:

    Undergraduate Degree:
    Annuity Cash inflow (A) $ 50,000
    Annual required return % 10%
    Number of Years 10
    Present value of $1 Annuity (10%, 10 Periods) (B) 6.1446
    Present value of Cash inflows (C) = A*B = $ 307,230.00
    Investment (D) $ -
    Net Present value (C-D)$ 307,230

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