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A prospective MBA student earns $60,000 per year in her current job and expects that amount...

A prospective MBA student earns $60,000 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 $85,000 and that amount will increase by 13% per year. Consider a time horizon of 10 years, use a discount rate of 15%, 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?

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Answer #1

Following are the NPVs

Doing MBA Not Doing MBA
Time Cost of MBA Salary after MBA Cash flows Time Present salary Cash flows
0 -50000 -50000 0 60000 60000
1 -50000 -50000 1 65400 65400
2 85000 85000 2 71286 71286
3 96050 96050 3 77701.74 77701.74
4 108536.5 108536.5 4 84694.8966 84694.8966
5 122646.245 122646.245 5 92317.43729 92317.43729
6 138590.2569 138590.2569 6 100626.0067 100626.0067
7 156606.9902 156606.9902 7 109682.3472 109682.3472
8 176965.899 176965.899 8 119553.7585 119553.7585
9 199971.4658 199971.4658 9 130313.5968 130313.5968
NPV 390466.9392 NPV 477047.4917

NPV of the better option of not doing MBA=

477047.4917

WORKINGS

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