People live for four periods. They can choose to work for all four periods, or can attend school in the first period and then work for the remaining three periods. If people do not attend school, their annual wage is $30,000 per period. If they do attend school, they earn $50,000. The cost of attending college is $28,000, the interest rate is 10 percent, and all people are identical. Do people go to school or not?

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welshmartin65 welshmartin65 · Answer 1 · 2019-10-09T10:09:58+02:00

Answer:

People should disregard schooling and thus work in the entire life period.

Explanation:

Condition 1--- Work throughout the 4 periods

The NPV = [tex]\frac{30,000}{1.1} + \frac{30,000}{1.1^2} + \frac{30,000}{1.1^3} + \frac{30,000}{1.1^4}[/tex]

= 27,272. 7 + 24,793.3 + 22,539.4 +20,490.4

= 95,095.8

Condition 2 - Attend school and work later

The NPV = -28,000 + [tex]\frac{50,000}{1.1^2} + \frac{50,000}{1.1^3} + \frac{50,000}{1.1^4}[/tex]

= -28000 + 41,322.31 + 37,565.7 + 34,150.6

= 85,038.61

Conclusion: Since the NPV of not going to school is higher, people should disregard schooling. They should work in the entire life period.