Question

Here is the life time income for Career A and Career B: - Career A: Period 0: $20K; Period 1: $40K - Career B: Period 0: $8K; Period 1: $55K If a student's discount rate is 0.3 , this student will choose: a. Career A b. Career B c. indifferent

Answer 1

By calculating the present value of the income for both Career A and Career B using a discount rate of 0.3, it is found that Career A has a slightly higher present value, making it the preferred choice for the student.

Step-by-step explanation:

To determine which career choice a student would prefer given a discount rate of 0.3, we must calculate the present value of the incomes from both careers. The present value is the value of a future amount of money today given a specific interest or discount rate.

For Career A, the present value of the income is:
PV_A = $20,000 + \frac{$40,000}{(1+0.3)} = $20,000 + \frac{$40,000}{1.3} \approx $50,769

For Career B, the present value of the income is:
PV_B = $8,000 + \frac{$55,000}{(1+0.3)} = $8,000 + \frac{$55,000}{1.3} \approx $50,385

Comparing these present values, we see that the present value for Career A is slightly higher. Therefore, choosing Career A would be financially more favorable for the student, assuming the discount rate accurately reflects their personal rate of return.