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A prospective MBA student earns $45,000 per year in her current job and expects that amount...

A prospective MBA student earns $45,000 per year in her current job and expects that amount to increase by 6% per year. She is considering leaving her job to attend business school for two years at a cost of $30,000 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 16% per year. Consider a time horizon of 10 years, use a discount rate of 9%, 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.

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Expert Solution

When she continues her existing Job then Present Value of Cash Flows

Year Cash Flow PVF @ 9% PV of Cash Flows
0 45000 1 45000
1 47700 0.917431193 43761.46789
2 50562 0.841679993 42557.02382
3 53595.72 0.77218348 41385.72959
4 56811.4632 0.708425211 40246.67281
5 60220.15099 0.649931386 39138.96622
6 63833.36005 0.596267327 38061.74696
7 67663.36165 0.547034245 37014.17595
8 71723.16335 0.50186628 35995.43716
9 76026.55316 0.46042778 35004.73705
PV of Cash Flow 398,165.9574

Note : Given salary increases by 6 % so salary for year 1 = 45000 * 1.06 = 47700 and so on.

When she chooses to stud MBA then Present value of Cash Flows will be

Year Cash Flow PVF @ 9% PV of Cash Flows
0 -30000 1 -30000
1 -30000 0.917431193 -27522.93578
2 90000 0.841679993 75751.19939
3 104400 0.77218348 80615.95532
4 121104 0.708425211 85793.12676
5 140480.64 0.649931386 91302.7771
6 162957.5424 0.596267327 97166.2582
7 189030.7492 0.547034245 103406.2931
8 219275.6691 0.50186628 110047.0643
9 254359.7761 0.46042778 117114.3069
PV of Cash Flow 703,674.0453

  Net present value of the more attractive choice is $703674.

jeff jeffy answered 2 years ago
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