Question

Sasha has finished compulsory education and is deciding what to do next. She has narrowed down her options to two alternatives. She will either become an operations analyst or a chef. Suppose that Sasha will live 2 additional periods. In the first, she gets her education. In the second, she works in the labor market. If Sasha becomes an operations analyst, she will spend $15,000 on tuition and books. She will then earn $472,000 in the second period. If she becomes a chef, it will cost her $40,000 in the first period, but she will earn $500,000 in the second period. Suppose that the interest rate, r, is 5 percent. If Sasha wants to maximize the present discounted value of her lifetime earnings, which career will she pursue?

Answer 1

First, let's consider the option of being an operation analyst in NPW=-P+ t=1+it In this equation, P= initial investment n= life i= interest rate C = cash flow at the end of period t NPW=(-15,000) + 472,000 1+0.05 NPW = $434,523.81 NPW = $434,524 Now consider the case of being a chef NPW=(-40,000) + 500,000 0. 1+0.05 = 436,190.47 NPW = $436,190 (NPW)chef> (NPW) operation analyst Therefore, she will pursue the career of a chef.