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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Personal investment analysis for a service company

 A Masters of Accountancy degree at Central University costs $12,000 for an additional fifth year of education beyond the bachelor’s degree. Assume that all tuition is paid at the beginning of the year. A student considering this investment must evaluate the present value 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 to earn an annual salary of $50,000 per year (assumed to be paid at the end of the year) for 10 years. Assume that the average student with a graduate Masters of Accountancy degree is expected to earn an annual salary of $66,000 per year (assumed to be paid at the end of the year) for nine years after graduation. Assume a minimum rate of return of 10%.

  1. 1. Determine the net present value of cash flows from an undergraduate degree. Use the present value table provided in this chapter in Exhibit 5.
  2. 2. Determine the net present value of cash flows from a Masters of Accountancy degree, assuming that no salary is earned during the graduate year of schooling.
  3. 3. What is the net advantage or disadvantage of pursuing a graduate degree under these assumptions?

1.

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To calculate: The net present value of under graduate degree.

Explanation

Calculate the net present value of under graduate degree option with 10% rate of return as follows:

Net present value of under graduate degree
Particulars
Annual salary (A)  $        50,000
Present value of $1 annuity for 10 years at 10% (B)              6...

2.

To determine

To calculate: The net present value of master of accountancy degree.

3.

To determine

To discuss: The net advantage or disadvantage of pursuing a graduate degree based on the net present value.

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