Long-term investment decision, NPV method Jenny Jenks has researched the financi

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 $102,000. On average, a person with an MBA degree earns an extra $21,000 per year (after taxes) over a business career of 36 years. Jenny feels that her opportunity cost of capital is 5.4%. 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: 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.) No, the benefits of further education are not worth the associated costs. The net present value (NPV7) 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. 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.

Explanation / Answer

Net Present Value = Present Value of Cash Inflows - Present Value of Cash out Flows
Present Value of cash outflows (CF0)= $102,000
Present Value of Cash Inflows
Extra Earnings per year= $21,000
no years = 36
Opportunity cost of capital = 5.4%
Present Value of Cash inflow or Annuity = $21,000*PVAF(5.4%, 36)
=$21,000 x 15.73
= $330,334
Net Present Value = $330,334 - $102,000=$228,334
Yes, the benefits of further education are worth the associated cost. Since the net present value of entering this MBA program is greater than $0, Jenny will earn greater than her opportunity cost of capital. This decision will increase Jenny's wealth by an amount equal to the NPV.

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