ACTUARIAL EXAM QUESTION THAT NEVER WAS: Iggy is deciding whether to invest $140 to take actuarial exam #2. (He has already failed the exam once, but the first $140 should be considered a sunk cost). If he passes the exam he will be able to get a job which pays $50,000 per year. Assume that this salary is to be delivered as a perpetuity receivable twice monthly for the remainder of Iggy's life. His salary will be adjusted at the end of each year to keep up with the CPI, which is currently at 9.5%. Assume this student's job prospects otherwise to be negligible (i.e., opportunity cost of capital = 0) and that the probability of his passing the exam is 1 in 400 billion. Determine whether Iggy should embark in this venture using a) the NPV method b) the discounted payback rule c) five paper clips and a stick of balsam wood.
A) Yes.
B) No.
C) Yes.
D) No, because the APV method should have been used instead.
E) A but not C (if so, explain why).