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Josh just turned 20 years old and works as a plumber. He considers taking a 1-year specialized degree in plumbing. The course costs $8,000. He
Josh just turned 20 years old and works as a plumber. He considers taking a 1-year specialized degree in plumbing. The course costs $8,000. He is currently working and earning $40,000 per year as a plumber for a small company. However, he is afraid a recession will start in which the small company will close down, and he would lose his job. He would be unemployed (no unemployment benefits) for 1 year but expects to find another job which pays him the same after that ($40,000 per year). However, as a master plumber he would earn $10,000 more per year and he would easily find a job, even in case of a recession. He believes that a recession will hit the country in 2 years from now (at age 22), with a probability of 0.5. (And for simplicity, if not then, it won't happen at all). Josh's discount rate is 5% and Josh intends to go travelling when he turns 28 years old. At this point, he does not care at all about what happens after that (i.e. his discount rate for that period is infinity). A) If Josh does go ahead with the specialist degree, what would the present discounted value of his entire income stream be (including the cost of the degree and earnings)? Round your answer to the nearest integer. B) If Josh chooses no degree, what would the expected present discounted value of his entire income stream be? Round your answer to the nearest integer. Hint. Suppose someone's income takes a value of 0 if a recession occurs, and it is equal to 10 if there is no recession. The probability of recession is 0.5. Then this person's expected income is equal to 0*0.5+10*0.5=5
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