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(solution) Alternatively, he can spend $50,000 to attend college in period 1


Alternatively, he can spend $50,000 to attend college in period 1 and then earn $180,000 in periods 2 and 3.  Finally, he can earn a doctorate degree in period 2 after completing his college education in period 1.  This last option will cost him nothing in tuition (or any other direct costs), but he will earn no salary in period 2.  After receiving his doctorate, he will become a professor in a business school and earn $450,000 in period 3.  Peter?s discount rate is 20 percent per period.  What education path maximizes Peter?s net present value of his lifetime earnings? (3 points)


Solution

 

PV = FV / (1 + r) ^n

 

Where; PV = Present Value

 

FV = Future value

 

R = discount rate = 20% = 0.2

 

N = number of periods

 

Path 1: Attend College in period 1 and earn $180,000 in periods 2 and...

 


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Sep 13, 2020

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