Peter lives for three periods. He is currently considering three alternative education-work options. He can start working immediately, earning $100,000 in period 1, $110,000 in period 2 (as his work experience leads to higher productivity), and $90,000 in period 3 (as his skills become obsolete and physical abilities deteriorate). Alternatively, he can spend $50,000 to attend college in period 1 and then earn $180,000 in periods 2 and 3. Finally, he can receive a doctorate degree in period 2 after completing his college education in period 1. This last option will cost him nothing when he is attending graduate school in the second period as his expenses on tuition and books will be covered by a research assistantship. After receiving his doctorate, he will become a professor in a business school and earn $400,000 in period 3. Peter’s discount rate is 20 percent per period. What education path maximizes Peter’s net present value of his lifetime earnings?
PVHS = 100,000 + 110,000/1.2 + 90,000/1.2^2 = $254,167
PVCOL = -50,000 + 180,000/1.2 + 180,000/1.2^2 = $225,000
PVPHD = -50,000 + 0/1.2 + 400,000/1.2^2 = $227,778
Thus, the best option for Peter is to start working upon completing high school.