Question

Consider an individual who currently earns $20,000 as an unskilled laborer. Suppose that by taking courses full-time at a community college for one year, the person can qualify for a more skilled job paying $23,000 that is guaranteed to last for 10 years (after which the person would retire). Assume the cost of tuition and books at the community college for one year is $2,000 and that the current interest rate is 6%. Is this a good investment

Answer 1

Answer:

investing in these college courses will increase this individual's wealth by $20,080, so it is a good idea

Explanation:

First of all, education is always a good investment. But we still need to analyse this situation like any other project:

initial outlay year 0 = $2,000 tuition costs

cash flows years 1 - 10 = $23,000 - $20,000 = $3,000

NPV = - initial outlay + PV of cash flows

PV of cash flows = $3,000 x 7.3601 (PV annuity factor, 6%, 10 periods) = $22,080

NPV = -$2,000 + $22,080 = $20,080