ECN437HumanCapital - 2 If she does go to grad school she...

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ECN437 Human Capital Suppose a friend is just about to graduate from college and is thinking of  going on to grad school. She is only interested in making the present value  of her income stream as high as possible, and she can borrow and lend at  an interest rate of 5%. 1. If she doesn’t go to grad school she can earn $30,000 a year for the next 45  years. What is the present value of this stream of income? (Hint: there's an  easier way to compute this than adding up 45 payments.)
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Unformatted text preview: 2. If she does go to grad school, she has to spend 3 years studying full time (that is, not working) and paying tuition of $20,000 a year. When she gets out, however, she’ll be able to earn $40,000 a year for 42 years. What is the present value of this part of the decision? What decision should she make? Would your advice be the same if the interest rate were a lot higher?...
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