Question

Two college seniors are making decisions about whether to seek a job in hospital administration right after graduation (in 2021) or to attend graduate school for a 1-yr Masters in Health Administration (MHA) first and then enter the job market in 2022. Suppose the following are what they expect will be the costs of schooling and the salaries from the jobs: Enter hospital administration Enter hospital administration position after bachelor's after MHA degree degree Year 1 (2021-22) $30,000 (earnings) -$26,000 (MHA tuition} Year 2 (2022-23) $32,000 (earnings) $65,000 (earnings) Year 3 (2023-24) $34,000 (earnings} $69,000 {earnings) a) What is the present value (PV), at college graduation time, of the two choices available, for these two students? For this, we need to know time discount rates from one period (year) to the next. Suppose that one student (let's call him John) has a time discount rate of 0.1 while the other (let's call her Marsha) has 0.2. Please explain the career choice decisions that will be made by John and by Marsha, using the present value as the basis for judgment.

Answer 1

Calculating the present value of future earnings with different discount rates shows that John, with a discount rate of 0.1, will value the MHA degree higher, while Marsha, with a higher discount rate of 0.2, may prefer immediate employment. These decisions are influenced by their respective time discount rates and the assumption that higher education increases future earnings.

Step-by-step explanation:

To determine which career choice is better financially for two college seniors considering either entering hospital administration immediately or pursuing a Masters in Health Administration (MHA) first, we calculate the present value (PV) of the two options. Present value calculations allow us to compare the worth of cash flows received at different times by discounting them to a common point in time, which, in this case, is the time of college graduation.

For John, with a time discount rate of 0.1 (10%), the PV calculations are as follows:

1. Year 1: $30,000 / (1 + 0.1) = $27,272.73
2. Year 2: $32,000 / (1 + 0.1)2 = $26,446.28
3. Year 3: $34,000 / (1 + 0.1)3 = $25,701.12
4. For the MHA degree option:
5. Year 1: -$26,000 / (1 + 0.1) = -$23,636.36
6. Year 2: $65,000 / (1 + 0.1)2 = $53,719.01
7. Year 3: $69,000 / (1 + 0.1)3 = $56,198.35
8. For Marsha, with a time discount rate of 0.2 (20%), the PV calculations are a bit different:
9. Year 1: $30,000 / (1 + 0.2) = $25,000
10. Year 2: $32,000 / (1 + 0.2)2 = $22,222.22
11. Year 3: $34,000 / (1 + 0.2)3 = $19,753.09
12. For the MHA degree option:
13. Year 1: -$26,000 / (1 + 0.2) = -$21,666.67
14. Year 2: $65,000 / (1 + 0.2)2 = $45,082.64
15. Year 3: $69,000 / (1 + 0.2)3 = $47,685.19

John and Marsha will compare the sum of the present values for the two options to make their decisions. John, with a lower time discount rate, will see the MHA degree as a better investment due to higher future earnings despite the upfront cost, whereas Marsha, with a higher time discount rate, might lean towards starting her career right away. The calculations are based on the assumption that pursuing an MHA will lead to significantly increased earnings, as supported by earnings data for higher educational attainments.