Your child (John) has come to you for advice. He is about to enter college and has two options open to him. His first option is to study petroleum engineering. If he does this, his undergraduate degree would cost him $20,000 a year for four years. Having obtained this, he would need to gain two years of practical experience: in the first year he would earn $50,000, in the second year he would earn $60,000. He would then need to obtain his master’s degree, which will cost $25,000 a year for two years. After that he will be fully qualified and can earn $80,000 per year for 30 years.
His other alternative is to study finance. If he does this, he would pay $10,000 a year for four years and then he would earn $60,000 per year for 32 years.
The effort involved in the two careers is the same, so he is only interested in the earnings the jobs provide. All earnings and costs are paid at the end of the year. What advice would you give him if the market interest rate is 4 percent? A day later he comes back and says he took your advice, but in fact, the market interest rate was 6 percent. Will you advise him differently and if so why? (show using a financial calculator, step by step)