Reference no: EM131423889

A high school graduate is considering whether to attend college. He predicts that his earnings if she doesn't attend college will be $25,000 per year (real). He predicts that his earnings after four years of college will be $37,000. Tuition costs are $5,000 per year. Assume that college begins at age 18, and ends at age 22, and that he will work until age 65. (You will find it useful to use a spreadsheet program to solve this problem.)

a. Write out the equation used to evaluate the net benefit of a college education, for discount rate r.

b. If the discount rate is 5%, what is the value of the net benefit (which could be positive or negative) of a college education?

c. How does your answer change if the discount rate is 10%? Why?

d. Suppose the high school graduate estimates that his probability of dying in any year is .01 (so his probability of surviving is .99). How should the equation in part a be modified to account for this?

e. Recalculate the present value of the net benefit of a college education with the mortality risk assumed in part d.

f. Returning to parts a and b, suppose we assume that instead of working until age 65, the individual works forever. How can we calculate the net benefit of a college education? Do the calculation.