Imagine Roger is contemplating going school to complete a Masters degree in the current period while working part-time instead of full time. There are six relevant periods of his work life, periods t = 0, 1, 2…5. His earnings each period if he gets the additional education are given by
Yt = 100 + 200t
If he doesn’t get the education his earnings are given by
Yt = 200 + 150t
Imagine that Roger shares the discount rate of the economy as given by the interest rate of .1.
a. Is the education a good investment? Show work.
b. If Jane faces the same choice but has a discount rate of .25, is the education a good investment for her?
c. What behavioral factors might indicate Jane’s higher discount rate?
d. What is the approximate internal rate of return for the investment in education indicated in this problem?