It is the end of your final year of study as a student in theMaster of Finance program and you are trying to determine what youare going to do over the remaining 35 years of your working life.You are trying to decide whether you should remain at universityand do your PhD in finance or alternatively leave university andbecome a consultant.

You anticipate that it will take you 5 years to complete yourPhD during which time you will earn a real net cash flow of $25,000p.a. At the end of these 5 years you must decide whether to remainat the university as an academic or take up a career as aconsultant.  There is a 10% chance that you will enjoygreat success as an academic earning a salary of  $85,000p.a., a 50% chance that you will have a moderately successfulcareer earning a salary of $65,000 p.a. and a 40% chance that youwill have an unsuccessful academic career earning a salary of only$45,000 p.a. If you decide to become a consultant then it willinitially cost you $100,000 to set up your business and there is an80% chance of generating $60,000 p.a. and a 20% chance ofgenerating $120,000 p.a..

If you decide not do a PhD and instead become a consultantimmediately, there is a 60% chance that you will earn $70,000 p.a.and a 40% chance that you will earn $50,000 p.a. over the remainderof your working life.

Assume that all cash flows (other than those specifiedotherwise) occur at year-end, are expressed in real terms (that isin terms of purchasing power today) and that the real opportunitycost of capital is 10%.

You are to assume that for personal (as opposed tofinancial) reasons, you have decided to do aPhD. Using the decision tree approach,estimate the value of the option associated with not having to stayin academia after you acquire yourPhD.