Question

Long-term investment ​decision, NPV method   Jenny Jenks has researched the financial pros and cons of entering into a​ 1-year MBA program at her state university. The tuition and needed books for a​ master's program will have an upfront cost of

​$52,000.

If she enrolls in an MBA​ program, Jenny will quit her current​ job, which pays

​$50,000

per year after taxes​ (for simplicity, treat any lost earnings as part of the upfront​ cost). On​ average, a person with an MBA degree earns an extra

​$21,000

per year​ (after taxes) over a business career of

39

years. Jenny believes that her opportunity cost of capital is

6.9​%.

Given her​ estimates, find the net present value​ (NPV) of entering this MBA program. Are the benefits of further education worth the associated​ costs?

The following time line depicts the cash flows associated with this​ problem:

00

11

22

39

Tuition left parenthesis CF 0 right parenthesisTuition (CF0)

−$102,000

Extra earnings Extra earnings

$21,000

$21,000 times •••

$21,000

The net present value​ (NPV) of entering this MBA program is

​_____.

  ​(Round to the nearest​ dollar.)

Are the benefits of further education worth the associated​ costs? ​ (Select the best answer​ below.)

​Yes, the benefits of further education are worth the associated costs. Since the net present value​ (NPV) of entering this MBA program is greater than​ $0, Jenny will earn a return greater than her opportunity cost of capital. This decision will increase​ Jenny's wealth by an amount equal to the NPV.

​No, the benefits of further education are not worth the associated costs. The net present value​ (NPV) of entering this MBA program is less than​ $0, this means Jenny will earn a return lower than her opportunity cost of capital. This decision will decrease​ Jenny's wealth by an amount equal to the NPV.

Answer 1

NPV of the option = Initial Capital+ PV of annuity which is calculated as (Annuity*(1-1/(1+r)^n)/r)

= -(52000+50000) + 21000*(1-1/(1+6.9%)^39)/6.9%

= -102000+21000*13.41871

= 179792.91

​Yes, the benefits of further education are worth the associated costs. Since the net present value​ (NPV) of entering this MBA program is greater than​ $0, Jenny will earn a return greater than her opportunity cost of capital. This decision will increase​Jenny's wealth by an amount equal to the NPV.