James has a job with a current salary of $42,000. He wants to earn a college degree that will take him 2 years to complete and it will cost $28,000 per year. He will go to school full time and will not be able to work. Upon graduation, James' new salary will be $56,000 per year. How many years will it take James to recover his investment?

Question

James has a job with a current salary of $42,000. He wants to earn a college degree that will take him 2 years to complete and it will cost $28,000 per year.  He will go to school full time and will not be able to work.  Upon graduation, James' new salary will be $56,000 per year.  How many years will it take James to recover his investment?

anonymous · Answer

Ignoring Time value of money, we can directly say that he can recover his investment in his first year of earning.(pay back period-56000/56000). But what it cost today is not same after 1 year. Hence there should be discount factor to calculate present value.