By choosing to attend college today, you have agreed to pay $17,000 per year in tuition and fees for the next five years. (What… you really thought that you would graduate in four years?)
In addition to the tuition and fees, you have also given up the ability to work full time and earn $23,000 per year for the next five years. If your required rate of return is 5% (the U.S. long-run average rate of inflation plus an average real rate of return), what is the total cost in today's dollars of your college degree, assuming that all of the aforementioned cash flows are ordinary annuities?
Answer:
PV = PMT × = $40,000 × = $173,179.07.
MODE = END
INPUT 5 5 ? -40,000 0
KEY N I/Y PV PMT FV
CPT 173,179.07
Explanation: The total cost includes both the cost of tuition plus the opportunity cost of not working.
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