1 Jonas lives in Germany and earns 20000 per year at his job

1. Jonas lives in Germany and earns $20,000 per year at his job. He is considering a job offer in the United States, which would give him a salary of $24,000 per year for the next 4 years, after which time he will return to Germany and start his university education. Moving costs (to the United States from Germany or from the U.S. back to Germany) would be $6,000, living expenses are similar in both places, and his personal discount rate is 6 percent. Assume the salaries are paid at the end of each year, moving expenses for moving to the United States to work must be paid at the beginning of the first year, and moving expenses for moving back to Germany must be paid at the end of the fourth year.

What is the present value of Jonas’s earnings if he stays in Germany?

What is the present value of Jonas’s earnings if he moves to the United States?

What is the present value of moving costs to the United States at the beginning of the first year and moving back to Germany at the end of the fourth year?

If Jonas is only concerned about maximizing the net present value of his earnings, should he move to the United States for the four-year period?

Solution

1. PV of earnings in Germany = 20,000 [ (1/1.06)^1 + (1/1.06)^2 + (1/1.06)^3 + (1/1.06)^4 ]  = $69,302.11

2. PV of earnings in USA = 24,000 [ (1/1.06)^1 + (1/1.06)^2 + (1/1.06)^3 + (1/1.06)^4 ] = $83,162.53

3. PV of moving costs = - 6,000 [ (1/1.06)^0 + (1/1.06)^4 ] = - $10,752.56

4. Total NPV of earning in USA = $83,162.53 - $10,752.56 = $72,409.97

He should move to USA because in that case his PV will be higher.

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