1) A prospective MBA student earns $50,000 per year in her current job and expec

Question

1) 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?

Explanation / Answer

NPV of MBA is better than NPV of earlier job. NPV of MBA is more attractive choice.

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After MBA job NPV 1 2 3 4 5 6 7 8 9 10 A Opportunity cost of Job -50,000 -54500 Growth in Job = 9% B Cost of MBA -50000 -50000 Growth in Job after MBA =10% C Salary growth = 10% 105000 115500.00 127050.00 139755.00 153730.50 169103.55 186013.91 204615.30 D Cash flows -100,000 -104,500 105,000 115,500 127,050 139,755 153,731 169,104 186,014 204,615 Discount Rate 10% NPV $453,831.71 NPV(E1,D1:D10) Before Job NPV After MBA job NPV 1 2 3 4 5 6 7 8 9 10 A Before MBA salary 50000 54500 59405 64751.45 70579.081 76931.198 83855.006 91401.956 99628.132 108594.66 B Discount Rate 10% Growth of job =9% C NPV $436,394.11 NPV(B1,A1:A10)

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