Reference no: EM131954003

1. Tom just completed high school and is trying to determine whether to go to university for two years or directly to work. His objective is to maximise the savings he will have in the bank five years from now. If he goes directly to work he will earn $19,500 per year for the next five years. If he goes to university, for each of the next two years he will earning nothing and will have to borrow $6,000 each year to cover his fees and books. The loan must be repaid in full three years after graduation. If he graduates from university, in the subsequent years his wages will be $37,500 per year. Tom's total living expenses and taxes excluding fees and books, equals $15,000 per year.
2. Suppose for simplicity that Tom can borrow and lend at 0 percent interest. On purely economic grounds should he go to work or to university?
3. Does your answer to part (a) change if he can earn $25,000 without attending university?
4. Does your answer to part (a) change is Tom's fees and books cost $8,000 per year.