Question

A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 12% 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 $85,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 11%, 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?

Answer 1

Solution :

The Net present value of the current Job alternative  = $ 520,765.00

= $ 520,765 ( when rounded off to the nearest dollar )

The Net present value of the MBA alternative = $ 541,221.65

= $ 541,222 ( when rounded off to the nearest dollar )

Thus the Net present value of the MBA alternative is higher than that of the current job alternative.

Therefore the  net present value of the more attractive alternative = MBA alternative = $ 541,222

Please find the attached screenshots of the excel sheets containing the detailed calculation for the above solution.