Student A is a very studious, hard-working student. Student B preferred other activities to studying during senior year. Student A, due to the better grades that result from more studying, will get a better job out of undergrad, while Student B will only get a decent job after undergrad. Using the following assumptions, back out what implicit value student B places on his/her free time (per hour) these days (assuming the school year is 32 weeks). For simplicity, assume their job begins in Year 1, pays the full salary at the end of the year, and each works for 40 years. Ignore taxes and living expenses.
|
Student
|
A
|
B
|
|
Hours of Study per week
|
40
|
20
|
|
Starting Salary
|
70,000
|
40,000
|
|
Salary Growth
|
6%
|
5%
|
|
Weeks in school year
|
32
|
32
|
|
Discount Rate
|
12%
|
15%
|
[Hint: Find the present value of each student's future earnings and divide by the number of hours student B is saving during senior year by not studying more (compared to Student A).]