Question

A prospective MBA student earns $45,000 per year in her current job and expects that amount to increase by 8% per year. She is considering leaving her job to attend business school for two years at a cost of $30,000 per year. She has been told that her starting salary after business school is likely to be $95,000 and that amount will increase by 14% per year. Consider a time horizon of 10 years, use a discount rate of 14%, and ignore all considerations not explicitly mentioned here. Assume all cash flows occur at the start of each year (i.e., immediate, one year from now, two years from now,..., nine years from now). Also assume that the choice can be implemented immediately so that for the MBA alternative the current year is the first year of business school. What is the net present value of the more attractive choice? Please round your answer to the nearest dollar.

Please work both parts of the problems so I can find out from my equation why I keep getting the wrong answers. Thank you.

Answer 1

Present value of not doing MBA and staying in the current job will be:

PV =45000 + 45000 x (1.08)/1.14 + 45000 x (1.08/1.14)^2 + ....45000 x (1.08/1.14)^9

PV = $357,085.0615

Now, for the MBA alternative, we will calculate the PV for 10 years with the first two years having negative cash flows.

PV = -30000 + -30000/1.14^1 + 95000/1.14^2 + 95000 x 1.14/1.14^3 + .... + 95000 x 1.14^7/1.14^9

PV = $528,479.5322

Hence, the more attractive choice is MBA and its PV is $528,479.53.