Salary will remain constant in real terms

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Suppose that at age 22, you have just finished college and have been offered a job with a starting salary of $40,000. Your salary will remain constant in real terms. However, you have also been admitted to a professional school. The school can be completed in two years. Upon graduation, you expect your starting salary to be 10% higher in real terms and to remain constant in real terms thereafter. The tax rate on labor income is 40%.

a. If the real interest rate is zero and you expect to retire at age 60 (i.e., if you do not go to professional school, you expect to work for 38 years total), what is the maximum you should be willing to pay in tuition to attend this professional school?

b. What is your answer to part (a) if you expect to pay 30% in taxes?

Reference no: EM131135153

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