A high school student is trying to decide what to do after high school. She coul

Question

A high school student is trying to decide what to do after high school. She could get a job, where she expects to make an average of $25,000 per year over the next 10 years. She assumes she will have no problems finding a job. She can attend an Ivy League school, which will cost $30,000/year for 4 years if she gets a degree in the liberal arts or business. If she decides to major in engineering, she concludes (perhaps incorrectly) that her studies will be much more stressful, and that she should assign an extra $10,000/year in costs. There is a 50% chance that she will get into an Ivy League school. If she does not, she can either get a job immediately, or go to a local state school. If she gets an Ivy League degree, she anticipates an average salary of $60,000/year if she does not get an engineering degree, or $80,000/year if she does. There is an 80% chance she will get such a job after she graduates. If not, she can find the type of job she would have gotten had she not gone to college. If she attends a state school, her costs will be $10,000/year for liberal arts/business and $15,000/year for engineering. She assumes there is a 95% chance she will be accepted at a state school, and a 75% chance she will be able to find a position after graduating. She anticipates average salaries of $50,000/year and $65,000/year, depending on her major. Assume there are no time value of money concerns. Draw the decision tree and make recommendations on which decisions are the most appropriate.

Explanation / Answer

Lets assume the time horizon to be 10 year after High School in order to take a decision

Option 1- Getting a job after High School

Cost incurred = 0

Earning in the next 10 years = 25000 x 10 = $250000

Option 2 - Getting a degree in liberal arts from Ivy League school and working after that

Total Earnings = 0.5 ( 60000 x 6 x 0.8 + 25000 x 6 x 0.2 - 30000 x 4) = $99000

Option 3- Getting a degree in engineering from Ivy League school and working after that

Total Earning = 0.5 ( 80000 x 6 x 0.8 + 25000 x 6 x 0.2 - 40000 x 4) = $127000

Option 4- Getting a degree in liberal arts from State School and working after that

Total Earning= 0.95 ( 50000 x 6 x 0.75 + 25000 x 6 x 0.25 - 10000 x 4) = $211375

Option 5- Getting a degree in Engineering from State School and working after that

Total Earning= 0.95 ( 65000 x 6 x 0.75 + 25000 x 6 x 0.25 - 15000 x 4) = $256500

Therefore, we should go with Option 5.

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