Question

Explain the concept of the time value of money and how it is related to the opportunity costs of a college education, both while attending college and after graduation.

Answer 1

Time value of money is based on the idea that the present worth of same amount of money will be more than the future worth of same amount if money. Interest rate is always positive so discounting reduces the value of money in future. This is based on the principle that investors prefer to receive amount sooner and if the amount is received later they would want higher returns on that amount. If the amount is received in future investors would want to receive higher amount in future due to the risk undertaken by the investor

Joining college or taking up job decision needs analysis of opportunity costs. Joining college requires an initial investment and after college will get a higher salary. Joining college instead of taking a job includes opportunity cost of losing income for the number of years of college. This lost salary has present time value.