It is December 2016 and you are thinking about whether to start a Masters program or

begin work come Jan. 1. Either way, you plan to work for 30 years before retiring (so you

will retire at t=30 if you dont go to school and t=31 if you do go to school).

If you were to start work now you expect your starting salary to be $50,000, with the first

payment arriving exactly one year from today. Due to the poor economy you dont foresee

a raise for the first 3 years, but after the 3

rd

year (i.e., after t=3) you expect to get a 15%

raise. You expect another 25% raise after the 10

th

year (i.e., after t=10) and constant salary

after that until your last payment at t=30.

The masters program costs $70,000, paid immediately, and takes exactly 1 year. With a

masters degree you believe that your starting salary will be $65,000 per year. You also

think that you will learn some skills that will increase your bargaining power in salary

negotiations. Thus, you believe that if you get a Masters your salary will grow steadily at

3% per year for your entire working life.

Assuming the discount rate is 10% and that all wages are paid at the end of the year, what

is the difference in present value between your wages going to school and not going to

school? If all you care about are these wages should you go to school? What is the most

you would be willing to pay for school under the wage assumptions in the problem?