You are about to graduate and are wondering what career to pursue. You have narr

Question

You are about to graduate and are wondering what career to pursue. You have narrowed the choice to three alternatives:

a. Go to work as a junior-level executive and work your way up.

b. Go to business school, get an MBA, and work as an executive then.

c. Go to graduate school, get a PhD in economics (eventually), and teach as a university professor.

You face the following expected cost and return streams. Assume each period is of equal length. [Although this example is a bit simple-minded, it captures the choices quite well.] Time 1 Time 2 Time 3 Time 4 Option A 30,000 34,000 38,000 42,000 Option B -20,000 50,000 60,000 80,000 Option C -10,000 -10,000 30,000 41,000

a. Calculate the net present value of each choice, assuming

i. an interest rate of 10%, and

ii. an interest rate of 20%.

Show your calculations.

b. Why might someone choose Option C?

Explanation / Answer

PV for Year 1 = Cashflow / (1 + Interest rate)Year

A person may choose option C for other factors like interest in academic research, better work-life balance offered as a professor etc.

Option A PV(10%) PV(20%) 1 30000 27272.73 25000 2 34000 28099.17 23611.11 3 38000 28549.96 21990.74 4 42000 28686.57 20254.63 NPV 112608.4 90856.48

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