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Suppose that you have received two job offers.Rearden Metal offers you a contract for $75,000 per year for the next two years while Wyatt Oil offers you a contract for $90,000 per year for the next two years.Both jobs are equivalent.Suppose that Rearden Metal's contract is certain,but Wyatt Oil has a 60% chance of going bankrupt at the end of the year.In the event that Wyatt Oil files for bankruptcy,it will cancel your contract and pay you the lowest amount possible for you to not quit.If you do quit,you expect you could find a new job paying $75,000 per year,but you would be unemployed for four months while searching for this new job.
-Assuming your cost of capital is 6 percent,the present value of your expected wage if you accept Wyatt Oil's offer is closest to:

Question

Quizplus · Accepted Answer

The expected wage from Wyatt Oil is calculated by considering the probability of bankruptcy and the resulting income. If Wyatt Oil does not go bankrupt (40% chance), you earn $90,000 for two years. If it does go bankrupt (60% chance), you earn $90,000 for the first year and then $75,000 for the second year after a four-month unemployment period. The present value of these expected wages is closest to $144,000 when discounted at 6%.

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