You have just finished high school and are debating two career paths. Regardless of the path chosen, you will maintain the same lifestyle, interest rates are the same, and you retire 40 years after leaving high school. All incomes are after-tax. Use an annual discount rate of 8%.

 

Alternative 1: Get a job. Under this alternative, you make $25,000 per year (paid out monthly) for the first 10 years, then receive a 30% raise every 10 years (1-10, 11-20, 21-30, 31-40).

 

Alternative 2:  Get more training. Under this alternative, you incur loans of $20,000 to cover the costs of living plus tuition each year. You take these loans out at the beginning of each year. Thankfully, they incur no interest while you are in school but re-payment is expected to begin the year after graduation (when, quite conveniently, your new job starts pays you for a whole year of work...). Your after-tax starting salary is expected to be $40,000 with a 25% raise every six years (5-10, 11-16, 17-22, etc). Repayment of the loan total is made over a 10-year period with annual payments and annual compounding at a rate of 8%.

 

What should you do? (what is the NPV of each alternative?)