ChiefsPlanet - View Single Post - Books Cost-Benefit analysis question.

**alnorth** · 01-30-2011, 10:55 PM

Cool problem. I'll restate the conditions first.

#1 Peace corps stint would last for 3 years
#2 In those 3 years, your food and lodging is paid for, and you would get $10,000 per year.
#3 Alternatively, you can forget the peace corps and start working right away. $50,000 per year, minus $15,000 expenses for paying for your own room and board, net $35,000 per year
#4 If you join the peace corps, you will receive emotional enjoyment worth the equivalent to you of $15,000 per year in those 3 years.
#5 If you join the peace corps, you incur a one-time cost in the first year of $8,000
#6 This condition is worded vaguely. (eg "lifetime pay at 1,000 per year" could mean the present value of your life earnings is reduced by 3,000, or that your starting salary after the peace corps will be 49,000, or that it will be 47,000, or some other interpretation) I decided to assume that after you get back from the peace corps, you will be working for 49,000 per year.
#7 You will retire 30 years after you are done with the peace corps, or 33 years from today. So you'll either be working at your job for 30 years or 33 years.
#8 If you work for the peace corps, you will gain $50,000 of present value.

Join peace corps
Year 1: 10k - 8k + 15k + 50k = 67k
Years 2 and 3: 10k + 15k = 25k
Years 4 through 33: 49k - 15k = 34k
Total: 1.137MM

Don't join peace corps
Years 1 through 33: 50k - 15k = 35k
Total: 1.155MM

It's very close, but I'm also coming up with no. Since we are including non-monetary "emotional" gains, I don't know that it would be appropriate to evaluate what happens when you introduce an interest rate. (otherwise with the numbers this close and that lump sum for joining the peace corps, there could be some interest rate that makes them equal)

Even though you might think the answer "should be" join the peace corps, I wouldn't be surprised if it was no. This seems like a clever way to fool the student into thinking one answer just has to be right and twisting the numbers around to fit that conclusion instead of just doing the math.

edit: going back to condition 6, if that merely meant your present value is reduced by 3000, then you should join the peace corps.

01-30-2011, 10:55 PM	#16
alnorth . Join Date: Dec 2002 Casino cash: $57166239	Cool problem. I'll restate the conditions first. #1 Peace corps stint would last for 3 years #2 In those 3 years, your food and lodging is paid for, and you would get $10,000 per year. #3 Alternatively, you can forget the peace corps and start working right away. $50,000 per year, minus $15,000 expenses for paying for your own room and board, net $35,000 per year #4 If you join the peace corps, you will receive emotional enjoyment worth the equivalent to you of $15,000 per year in those 3 years. #5 If you join the peace corps, you incur a one-time cost in the first year of $8,000 #6 This condition is worded vaguely. (eg "lifetime pay at 1,000 per year" could mean the present value of your life earnings is reduced by 3,000, or that your starting salary after the peace corps will be 49,000, or that it will be 47,000, or some other interpretation) I decided to assume that after you get back from the peace corps, you will be working for 49,000 per year. #7 You will retire 30 years after you are done with the peace corps, or 33 years from today. So you'll either be working at your job for 30 years or 33 years. #8 If you work for the peace corps, you will gain $50,000 of present value. Join peace corps Year 1: 10k - 8k + 15k + 50k = 67k Years 2 and 3: 10k + 15k = 25k Years 4 through 33: 49k - 15k = 34k Total: 1.137MM Don't join peace corps Years 1 through 33: 50k - 15k = 35k Total: 1.155MM It's very close, but I'm also coming up with no. Since we are including non-monetary "emotional" gains, I don't know that it would be appropriate to evaluate what happens when you introduce an interest rate. (otherwise with the numbers this close and that lump sum for joining the peace corps, there could be some interest rate that makes them equal) Even though you might think the answer "should be" join the peace corps, I wouldn't be surprised if it was no. This seems like a clever way to fool the student into thinking one answer just has to be right and twisting the numbers around to fit that conclusion instead of just doing the math. edit: going back to condition 6, if that merely meant your present value is reduced by 3000, then you should join the peace corps. __________________ how many emo kids does it take to change a lightbulb? HOW MANY?! none they just sit in the dark and cry Last edited by alnorth; 01-30-2011 at 11:04 PM..
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