You have just completed your BA in finance, and you are debating between pursuing a career in banking or as a Finance Professor. If you become a banker, you can start your job today. Your yearly salary will be $$80,000$ per year for the first three years. In year $4,$ your salary will be $$90,000,$ and it will grow at a rate of $3\%$ each year after that $($assume that salaries will be paid at the end of each year$).$ You expect that as a banker, you can work for $30$ years, after which time you will have to retire. Given the uncertainty in the banking profession, you have decided to use a $10\%$ discount rate for evaluating the cash flows.

If you become a Finance Professor, you will need to pursue graduate studies for $6$ more years. The tuition and other expenses each year will be $$50,000$ per year. Assume that the first tuition$/$expenses will be paid today $($you will make a total of six payments; each payment is made at the beginning of the year$).$ After you finish your graduate school six years from today, it will take you one year to find a job as a Professor $($i$.$e$.,$ you will get the job at the end of year $7).$ You expect to work for $40$ years as a Professor. Your starting salary will be $$90,000,$ and it will grow at a rate of $2\%$ per year $($assume that salaries will be paid at the end of each year and the first salary will be received at year $8).$ Given the less uncertainty of academia, you have decided to use a $5\%$ discount rate for this profession for evaluating the cash flows. What profession should you choose?

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Okay lets calculate the net present value NPV of each career path Banker Year 13 salar... View the full answer