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# Expected Returns

Author Message
Intern
Joined: 10 Jul 2010
Posts: 11

Kudos [?]: 3 [0], given: 0

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10 Oct 2011, 21:46
Need help solving some finance problems. Any help will be greatly appreciated.

Expected returns:
You have chosen biology as your college major to be a medical doctor. You find the probability of being accepted into medical school is about 10%. If you're accepted into medical school, then your starting salary when you graduate will be \$300,000 per year. However, if you are not accepted then you would choose to work in a zoo, where you will earn \$40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary?

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Kudos [?]: 3 [0], given: 0

Moderator
Status: battlecruiser, operational...
Joined: 25 Apr 2010
Posts: 981

Kudos [?]: 172 [0], given: 71

Schools: Carey '16

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10 Oct 2011, 22:56
alright, you're missing a couple things here...

so basically, you're trying to calculate the NPV of your education, which is actually a perpetuity, because we're just gonna assume that it goes on forever etc etc. But in any event, you're going to need to find what your investment dollar amount is (school tuition) and also the growth rate (salary increase etc etc) and from that I can help you calculate the NPV of this perpetuity that you are looking for....even though it won't be accurate at all because theory doesn't really apply directly to the world as it is only a fundamental basis to learn from.
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Kudos [?]: 172 [0], given: 71

Director
Joined: 14 Sep 2007
Posts: 907

Kudos [?]: 95 [0], given: 15

Schools: Kellogg '10

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11 Oct 2011, 14:23
vwjetty wrote:
alright, you're missing a couple things here...

so basically, you're trying to calculate the NPV of your education, which is actually a perpetuity, because we're just gonna assume that it goes on forever etc etc. But in any event, you're going to need to find what your investment dollar amount is (school tuition) and also the growth rate (salary increase etc etc) and from that I can help you calculate the NPV of this perpetuity that you are looking for....even though it won't be accurate at all because theory doesn't really apply directly to the world as it is only a fundamental basis to learn from.

Does he really need all that when the question is just asking for the amount of the starting salary, not the value of ROI or NPV associated with the schooling? I mean it explicitly says not to consider time value of money.
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Kudos [?]: 95 [0], given: 15

Moderator
Status: battlecruiser, operational...
Joined: 25 Apr 2010
Posts: 981

Kudos [?]: 172 [0], given: 71

Schools: Carey '16

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16 Oct 2011, 11:09
haha if he wants to get all technical, then yup, we gonna need some seriously technical data. otherwise, it would probably be a pretty easy question =)
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Kudos [?]: 172 [0], given: 71

Re: Expected Returns   [#permalink] 16 Oct 2011, 11:09
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