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Question 5 Mary earns $15 per hour, Paul earns S18 per hour, and Peter earns $22 per hour
Question 5
Mary earns $15 per hour, Paul earns S18 per hour, and Peter earns $22 per hour. Peter has three years of college, Paul has two, and Mary has one. The difference in their choice of years of education is due completely to different discount rates. How much can the available information reveal about each person's discount rate?
Question 6
Marie is about to choose a career path. She can either become a certified public accountant or a high school teacher. Marie lives two periods. In the first, she gets an education. In the second. she works in the labor market. If Marie becomes a certified public accountant, she will spend $45,000 on education in the first period and earn $500.000 in the second period. If she becomes a high school teacher. she will spend S30,000 on education in the first period and then earn $400.000 in the second period. Suppose Marie can lend and borrow money at a 5 percent rate of interest between the two periods.
a) Which career will she pursue?
b) What if she can lend and borrow money at a 15 percent rate of interest?
Expert Solution
5.)
Mary has two years more working experience than Peter and Paul. She valued working more than attending college thinking that she would earn higher interest rate. hence, Mary's discount rate is higher compared to Paul and Peter. Paul's discount rate is in between the rest of them because he has two years of college. And Peter valued attending college more than working. So, he has the lowest discount rate. Peter is least cared about interest rate that he would earn by working.
6.)
a)
NPV as accountant ($) = - 45,000 + 500,000 x P/A(5%, 1)
= - 45,000 + 500,000 x 0.9524
= - 45,000 + 476,200
= 431,200
NPV as teacher ($) = - 30,000 + 400,000 x P/A(5%, 1)
= - 30,000 + 400,000 x 0.9524
= - 30,000 + 380,960
= 350,960
b)
NPV as accountant ($) = - 45,000 + 500,000 x P/A(15%, 1)
= - 45,000 + 500,000 x 0.8696
= - 45,000 + 434,800
= 389,800
NPV as teacher ($) = - 30,000 + 400,000 x P/A(15%, 1)
= - 30,000 + 400,000 x 0.8696
= - 30,000 + 347,840
= 317,840
note:
P/A= ((1+ Interest rate)^ no. of period- 1)/ (interest rate* (1+ interest rate)^ no. of period)
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