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According to a guidance counselor, someone with a college degree can be expected to earn $25,000 per year more in their first year after graduation than someone who does not have a degree, and this difference grows by 7% each year. Suppose that you require a 10% rate of return on your investments.
(a)
Use a perpetuity to estimate the present value of the projected additional
earnings from having a college degree. Based on this, is graduating from college financially worth the effort and expense?
(b)
Instead of using a perpetuity, suppose that you assume a 40 year working career.
Calculate the present value of $25,000 per year for 40 years assuming the same rate you used in (a). How does this affect your conclusion?

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