Solved: You give up a full-time salary of $45,000 a year to go to

Question

You give up a full-time salary of $45,000 a year to go to school for 2 years. The total cost of going to school is $30,000. If you want to be able to recover your investment in 5 years or less, what is the minimum salary you would need to earn upon earning your degree?

A. $51,000

B. $60,000

C. $69,000

D. $75,000

Solution

You will not earn your salary for two consecutive years for the two years in school. To add on your unearned salary, you will have incurred $30,000 to service your school cost in these two years.

Take the forgone salary, $45,000*2, and the school costs, $30,000, as a deduction from your cash account. This means you ate at a negative balance of $90,000 + $30,000. The sum of these two is $120,000.

You intend to earn back the $120,000 in a period not exceeding five years. Per year, your minimum earning should be:

= $120,000 ÷ 5 years

= $24,000

Since you want to earn even your forgone salary, sum it up to $24,000.

= $24,000 + $45,000

Answer:

C. $69,000

Alternative Solution

Earning your money in 5 years means if you never forgone your full-time salary for 2 years, this would have been 7 years. Furthermore, you would not have paid $30,000 in schooling costs. By the end of 7th year, you would be having:

= ($45,000*7) + $30,000

= $315,000 + $30,000

= $345,000

You want to earn $345,000 in five years. Thus, the least amount you should earn per year is:

= $345,000 ÷ 5 years

= $69,000

If you were to get a job paying you $75,000, you would recover your money in less than five years.

Precisely, this would be 4.6 years ($345,000 ÷ $75,000).

Why You Need to Recover Your Money Soonest

Going to school is an investment. Even though it might not be measured like a real-life business investment project, there is a time within which it should pay back the money you committed to attain academic excellence.

If you decided not to go to school, you could be working elsewhere and earning yourself a salary. This is why you need at least reasonable pay for a shorter payback period.