Question

A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 9% per year. She is considering leaving her job to attend business school for two years at a cost of $50,000 per year. She has been told that her starting salary after business school is likely to be $105,000 and that amount will increase by 10% per year. Consider a time horizon of 10 years, use a discount rate of 10%, 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?

Answer 1

The NPV of the MBA option is higher, hence that is the more attractive choice

Doing MBA					Not Doing MBA
Time	Cost of MBA	Salary after MBA	Cash flows		Time	Present salary	Cash flows
0	-50000		-50000		0	50000	50000
1	-50000		-50000		1	54500	54500
2		105000	105000		2	59405	59405
3		115500	115500		3	64751.45	64751.45
4		127050	127050		4	70579.0805	70579.0805
5		139755	139755		5	76931.19775	76931.19775
6		153730.5	153730.5		6	83855.00554	83855.00554
7		169103.55	169103.55		7	91401.95604	91401.95604
8		186013.905	186013.905		8	99628.13208	99628.13208
9		204615.2955	204615.2955		9	108594.664	108594.664
		NPV	598760.3306			NPV	480033.5189

WORKINGS