Tuition costs $13,500 for UC Riverside Students. Suppose college lasts four years. Average salary for UCR graduates is $48,700. Average salary of someone who does not finish college is $37,400. Suppose everyone retires at age 65 and everyone leaves high school at age 18.
a. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.05? What is the present discounted value of going to UCR? Financially speaking, is going to UCR a good deal (assuming you would be continuously working and no wage growth)?
Hint: r = 1 / (1.05).
1 + r + r2 + ... + r46 = (1-r47) / (1-r)
1 + r + r2 + r3 = (1-r4) / (1-r)
r4 + r5 + ... + r46 = (r4-r47) / (1-r)
b. What is the present discounted value of working immediately instead of going to college if the discount rate is 0.25? What is the present discounted value of going to UCR? Financially speaking, is going to UCR a good deal (assuming you would be continuously working and no wage growth)? Same hint as in part a.
c. Now suppose you are entering your last year of college. You would have to pay 1 year of tuition and forgo 1 year salary at $37,400 to complete your degree. Maintain a high discount rate (r= 1/ 1.25). You anticipate working 44 years if you work instead of going to college (43 years if you do). Financially speaking, is going to UCR a good deal?
d. Please describe one way this model is unrealistic. Would making it more realistic tilt the predictions of the model to be more or less favorable for getting schooling?
e. In reality, is the last year of schooling before a degree equally valuable as all the other years of schooling? Put another way is the return to a year of schooling the same in the year you get a degree as it is in the years you don't? Explain why this is the case.