Question A:

Question B: If there is a recession in Year 3 and he has not done the specialist degree, what is the present discounted value of his Year 3 income? Use the same rounding conventions as in QA. Question C:

If there is a recession in Year 3 and he has not done the specialist degree, what is the present discounted value of his Year 3 income? Use the same rounding conventions as in Q1. Question D:

If Josh goes ahead with the specialist degree, what would his total present discounted value of earnings for all eight years be? Use the same rounding convention as in Q1. Question E:

Would you recommend to Josh that he does the specialist degree?

		Yes, because the discounted present value of his earnings stream will be higher with the specialist degree than without, whether or not the recession happens.
		No, the discounted present value of his earnings stream will be lower with the specialist degree than without, whether or not the recession happens.
		We can't tell on the information provided.
		No, the upfront costs of the degree are too high.

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 Year 3 (at age 22), with a probability of 50%. (And for simplicity, if not then, it won't happen before he turns age 28). Josh's discount rate is 5%, and he intends to go travelling when he turns 28 (years). At this point, he does not care at all about what happens after that i.e. his discount rate for that period is infinity). What is the present discounted value of his income in Year 3 if he does not do the specialist degree and the recession does not happen? Use the discount factor rounded to the nearest ten thousandth decimal place (keep four decimal digits only, e.g. 1.0500, 1.1234, etc.). Supply the answer rounded to the nearest integer. Hint: Use in the following table in Excel to help with calculations: Present discounted values of Yearly Incomes, net of education cost Specialist degree No Degree Year Discount factor Age no recession recession 1 1.0500 20 38095 38095 -7619 2 21 3 22 43193 4 1.2155 23 5 24 6 25 29849 7 26 8 27