Question
In: Finance
Education: Assume people live 2 years: youth (year 1) and adult (year 2). Youths either go...
Education: Assume people live 2 years: youth (year 1) and adult (year 2). Youths either go to school or work. If they go to school, they earn zero. If they work they earn $1000. As adults, everyone works. An educated adult earns $3000 while an uneducated adult earns $1800. The interest rate is 12% and the government pays the full cost of schooling at $350 per year.
Earnings
Earnings: Year 1 Year 2
A. Earnings profile: no school $1000 $1800
B. Earnings profile: with school 0 $3000
C. Earnings gain from schooling -$1000 +$1200
Therefore, calculate the present discounted value of the benefits of schooling and the rate of return for both the individual and society.
Net Private Benefit?
Private Rate of Return?
Net Social Benefit?
Social Rate of Return?
Solutions
Expert Solution
Solution:
| Given, | |||
| Considering earnings as the cash-flows at end of year. | Year 1 | Year 2 | |
| Earnings Profile (No school) | 1000 | 1800 | |
| Earnings Profile (School) | 0 | 3000 | |
| Earning gains from schooling | -1000 | 1200 | |
| Initial Investment for individual for School at start | 0 | ||
| Investment for society for School in at start | -350 | ||
| Year 0 | Year 1 | Year 2 | |
| Cashflows for individual | 0 | -1000 | 1200 |
| Cashflows for society | -350 | -1000 | 1200 |
| Interest rate | 12% | ||
| Present discounted value of schooling for individual or net private benefit: | ((-1000/(1.12)) + (1200/(1.12)^2)) - 0 | 63.77551 | |
| Private rate of return or IRR for individual | 20.00% | ||
| Present discounted value of schooling for society or net social benefit: | ((-1000/(1.12)) + (1200/(1.12)^2)) - 350 | -286.224 | |
| Social rate of return or IRR for society | -8.990% |
jeff jeffy answered 5 months agoRelated Solutions
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