Question

A prospective MBA student earns $60,000 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 $45,000 per year. She has been told that her starting salary after business school is likely to be $90,000 and that amount will increase by 10% 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? Please round your answer to the nearest dollar. Please check your answer I have received the wrong answer for this question before.

Answer 1

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