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A prospective MBA student earns $55,000 per year in her current job and expects that amount...

A prospective MBA student earns $55,000 per year in her current job and expects that amount to increase by 14% 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 $110,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 12%, 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

The present value of staying in current job is found as follows

Current Job
Year Cash inflows
0 55000
1 62700
2 71478
3 81484.92
4 92892.8088
5 105897.802
6 120723.4943
7 137624.7835
8 156892.2532
9 178857.1687

The present value of the cash inflows from current job =  $ 596,368.22

_____________________________________________________________

Attend business school
Year Cash flows
0 -50000
1 -50000
2 110000
3 126500
4 145475
5 167296.25
6 192390.6875
7 221249.2906
8 254436.6842
9 292602.1869

The present value of the cash inflows by attending business school = $ 676,300.09

____________________________________________________________________________

Thus attending MBA school is an attractive choice and its present value equals  $ 676,300.09

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