About maximizing the present value of lifetime earnings

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Reference no: EM131495377

Hank has just graduated from high school and is going to live 2 more periods. He has found a pet walking job that pays $30 thousand in each of his 2 remaining periods right out of high school. Hank is also considering going to college to earn an economics degree with which he can earn $90 thousand in his last remaining period. However, college costs $20 thousand in tuition, books, and fees, and $5 thousand in room and board expenses during the first period.

a. Assuming that the interest rate is 25%, find out whether Hank will choose to attend college, assuming that he only cares about maximizing the present value of lifetime earnings. Be sure to show all of your computations clearly, formulas and all.

b. Briefly outline how each of the following might change Hank’s mind: (i) a reduction in the interest rate; (ii) receiving a scholarship to help pay for college; and (iii) discovering that she has 3 more periods to live after high school rather than 2. (Additional computations are welcome but not essential. However, answers should make clear reference to relevant formulas.)

Reference no: EM131495377

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