Fun with IRR. Suppose you have just graduated from college and are deciding on a career....

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Fun with IRR. Suppose you have just graduated from college and are deciding on a career. Your four career options, along with your salary in each of the four earning periods, are displayed in table 3. Assume that any career will only last four periods before retirement. Table 4: Career options and salary information Occupation Ophthalmologist Accountant period 0 -5 2 Starving artist 1 Sports superstar 15 Period 1 1 3 1 0 Salary Period 2 10 4 1 0 Period 3 12 5 1 0 (4 points) a. Assume your discount factor d = 0.95. Find the value of the interest rate r that corresponds to your discount factor. (8 points) b. Find the IRR for becoming an ophthalmologist as opposed to an accountant. That is find a value of r* that equates these two NPV [Hint: you will probably want to use a graphing calculator or an online equation solver to find r*.] Do you prefer to be an ophthalmologist or becoming an accountant? (8 points) c. Find the IRR for becoming an ophthalmologist as opposed to a sports superstar. Com- pare your result with the IRR from (a) and interpret this difference in terms of the concept of patience. (4 points) d. The IRR for becoming an accountant as opposed to a starving artist is infinite. Explain why this makes sense. (4 points) e. Does the NPV of salaries in the various professions tell you everything you need to know about picking a career? What does this calculation leave out? Fun with IRR. Suppose you have just graduated from college and are deciding on a career. Your four career options, along with your salary in each of the four earning periods, are displayed in table 3. Assume that any career will only last four periods before retirement. Table 4: Career options and salary information Occupation Ophthalmologist Accountant period 0 -5 2 Starving artist 1 Sports superstar 15 Period 1 1 3 1 0 Salary Period 2 10 4 1 0 Period 3 12 5 1 0 (4 points) a. Assume your discount factor d = 0.95. Find the value of the interest rate r that corresponds to your discount factor. (8 points) b. Find the IRR for becoming an ophthalmologist as opposed to an accountant. That is find a value of r* that equates these two NPV [Hint: you will probably want to use a graphing calculator or an online equation solver to find r*.] Do you prefer to be an ophthalmologist or becoming an accountant? (8 points) c. Find the IRR for becoming an ophthalmologist as opposed to a sports superstar. Com- pare your result with the IRR from (a) and interpret this difference in terms of the concept of patience. (4 points) d. The IRR for becoming an accountant as opposed to a starving artist is infinite. Explain why this makes sense. (4 points) e. Does the NPV of salaries in the various professions tell you everything you need to know about picking a career? What does this calculation leave out?

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ANSWER a To find the interest rate r that corresponds to a discount factor of 095 we can solve the equation 11rt 095 where t is the time period 4 in t... View the full answer