Georgina is contemplating entering the job market after graduating from high school. Her future lifespan is divided into three periods. If she goes to university for the first, and earns an income for the following two periods her lifetime balance sheet will be:
(i) -$20,000;
(ii) $40,000;
(iii) $50,000.
The negative value implies that she will incur costs in educating herself in the first period. In contrast, if she decides to work for all three periods she will earn $20,000 in each period. The answer here involves discounting, and you should assume that the first period is today, the second period amount must be discounted back one period, and the final amount discounted back two periods.
(a) If the interest rate is 10% should she go to university or enter the job market immediately?
(b) If the interest rate is 2% what should she do?
(c) Can you find some value for the interest rate that will change her decision?