A prospective MBA student earns $60,000 per year in her current job and expects that amount...
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A prospective MBA student earns $60,000 per year in her currentjob and expects that amount to increase by 14% per year. She isconsidering leaving her job to attend business school for two yearsat a cost of $45,000 per year. She has been told that her startingsalary after business school is likely to be $90,000 and thatamount will increase by 10% per year. Consider a time horizon of 10years, use a discount rate of 12%, and ignore all considerationsnot explicitly mentioned here. Assume all cash flows occur at thestart of each year (i.e., immediate, one year from now, two yearsfrom now,..., nine years from now). Also assume that the choice canbe implemented immediately so that for the MBA alternative thecurrent year is the first year of business school. What is the netpresent value of the more attractive choice? Please round youranswer to the nearest dollar. Please check your answer I havereceived the wrong answer for this question before.
A prospective MBA student earns $60,000 per year in her currentjob and expects that amount to increase by 14% per year. She isconsidering leaving her job to attend business school for two yearsat a cost of $45,000 per year. She has been told that her startingsalary after business school is likely to be $90,000 and thatamount will increase by 10% per year. Consider a time horizon of 10years, use a discount rate of 12%, and ignore all considerationsnot explicitly mentioned here. Assume all cash flows occur at thestart of each year (i.e., immediate, one year from now, two yearsfrom now,..., nine years from now). Also assume that the choice canbe implemented immediately so that for the MBA alternative thecurrent year is the first year of business school. What is the netpresent value of the more attractive choice? Please round youranswer to the nearest dollar. Please check your answer I havereceived the wrong answer for this question before.
Answer & Explanation Solved by verified expert
Alternative 1: Continuing present job
PV = Pmt x (1 + i) x (1 - (1 + g) n x (1 + i)-n) / (i - g)
Pmt = 60,000
Discount rate (i) = 12%
Growth rate (g) = 14%
No of years (n) = 10
= 60000 × (1+0.12) × (1- (1+0.14)10 × (1+0.12)-10/ (0.12-0.14)
= 650583.51
(Or)
|
Year |
Cashflow |
Present value@12% |
Discounted cashflow |
|
1 |
60000.00 |
1 |
60000.00 |
|
2 |
68400.00 |
0.8929 |
61071.43 |
|
3 |
77976.00 |
0.7972 |
62161.99 |
|
4 |
88892.64 |
0.7118 |
63272.03 |
|
5 |
101337.61 |
0.6355 |
64401.88 |
|
6 |
115524.87 |
0.5674 |
65551.92 |
|
7 |
131698.36 |
0.5066 |
66722.49 |
|
8 |
150136.13 |
0.4523 |
67913.96 |
|
9 |
171155.19 |
0.4039 |
69126.71 |
|
10 |
195116.91 |
0.3606 |
70361.11 |
|
Net Present value |
650583.51 |
Alternative 2: Going for MBA
|
Year |
Cash flow |
Present value@12% |
Discounted cash flow |
|
1 |
-45000.00 |
1 |
-45000.00 |
|
2 |
-45000.00 |
0.8929 |
-40178.57 |
|
3 |
90000.00 |
0.7972 |
71747.45 |
|
4 |
99000.00 |
0.7118 |
70466.24 |
|
5 |
108900.00 |
0.6355 |
69207.92 |
|
6 |
119790.00 |
0.5674 |
67972.06 |
|
7 |
131769.00 |
0.5066 |
66758.28 |
|
8 |
144945.90 |
0.4523 |
65566.16 |
|
9 |
159440.49 |
0.4039 |
64395.34 |
|
10 |
175384.54 |
0.3606 |
63245.42 |
|
Net present value |
454180.31 |
The NPV of most attractive choice of continuing current job is 650583.51
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A prospective MBA student earns $60,000 per year in her currentjob and expects that amount to increase by 14% per year. She isconsidering leaving her job to attend business school for two yearsat a cost of $45,000 per year. She has been told that her startingsalary after business school is likely to be $90,000 and thatamount will increase by 10% per year. Consider a time horizon of 10years, use a discount rate of 12%, and ignore all considerationsnot explicitly mentioned here. Assume all cash flows occur at thestart of each year (i.e., immediate, one year from now, two yearsfrom now,..., nine years from now). Also assume that the choice canbe implemented immediately so that for the MBA alternative thecurrent year is the first year of business school. What is the netpresent value of the more attractive choice? Please round youranswer to the nearest dollar. Please check your answer I havereceived the wrong answer for this question before.
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