Reference no: EM134039692

Question

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).

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

1. 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.

2. No, the discounted present value of his earnings stream will be lower with the specialist degree than without, whether or not the recession happens.

3. We can't tell on the information provided.

4. No, the upfront costs of the degree are too high.