Suppose that you enter a one year training program in year 0. Tuition, fees, and other out of pocket expenses for the program are $10,000. If you had not entered the training program. you would have earned $20,000 during year 0. Because you are busy with the training program in year 0, you only earn $5000 that year. Without the training, you would also have earned $20,000 in years 1,2, and 3. With the training, you will earn $50,000 in year 1, $60,000 in year 2, and $70,000 in year 3. You would retire in year 4 whether or not you took the training. Assume the interest rate is 10%.
a) Find the net present value of the training program. Show your work.
b) Is the training program worth doing, in financial terms? Explain.
c) how would an increase in the interest rate affect the net present value of participating in this training program?
d) Suppose you were planning on participating in the labor force for more than 3 years after completing the training. How would that impact the net present value of the training?
e) So far, in this problem, we have been assuming that the post-training wages are absolutely certain. Suppose the post-training earnings given above are just average values of earnings in each post-training year (and that the actual earnings in any year is a random variable). How would this impact the value of the training program.
2. Why are employers more apt to subsidize specific training than general training?
3. Would employers be most apt to lay off workers with much specific training at the first sign of demand weakening or least apt to lay off such workers? Explain your reasoning.