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    minimum earnings

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    Suppose that an engineer is deciding whether or not to move to northern Virginia or remain at his current job in Milwaukee. It costs $10,000 for this person to move from Milwaukee, which includes both actual and "psychic" costs. If she plans on working 2 more periods and will make $110,000 in each in Milwaukee, what is the minimum earnings necessary to induce her to move to northern Virginia? Assume a .10 discount rate.

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    Solution Preview

    Here we must calculate the net present value (NPV) of both possibilities:

    - Staying in Milwaukee:
    In this case, the present value of her earnings (assuming that the 1st payment is to be collected at the end of the period) is:

    NPV = 100000/(1.10) + 100000/(1.10^2) = 173553.71

    So the NPV of staying in Milwaukee is ...

    Solution Summary

    The expert determines the minimum earnings in this case.