John lives for three periods. He is currently considering two alternative education-work options. Alternative 1: he can start working immediately, earning $100,000 in period 1, $110,000 in period 2, and $120,000 in period 3. Alternative 2: he can spend $50,000 to attend college in period 1 and then earn $200,000 in periods 2 and 3. John’s discount rate is 15 percent per period.
a. Compute John’s present value of lifetime earnings in alternative 1 (no college):
b. Compute John’s present value of lifetime earnings in alternative 2 (college):
c. Compute John’s present value of the gain of going to college
d. Compute John’s direct and indirect cost of going to college
e. What alternative will John choose? Why?