Present value of lifetime earnings in alternative

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John lives for three periods. He is currently considering two alternative education-work options. Alternative 1: he can start working immediately, earning $100,000 in period 1, $110,000 in period 2, and $120,000 in period 3. Alternative 2: he can spend $50,000 to attend college in period 1 and then earn $200,000 in periods 2 and 3. John’s discount rate is 15 percent per period.

a. Compute John’s present value of lifetime earnings in alternative 1 (no college):

b. Compute John’s present value of lifetime earnings in alternative 2 (college):

c. Compute John’s present value of the gain of going to college

d. Compute John’s direct and indirect cost of going to college

e. What alternative will John choose? Why?

Reference no: EM13744191

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