Question

Eugenia Monroe, 30 years old, is currently employed at an IT firm where she earns $38,000 a year. She expects that her salary will grow by 3% per year. She expects to retire at age 65. She has recently inherited $75,000 and is now considering what to do with the sum. She has two options: First, she could enroll in a certification program in net work design. The program requires completing 20 Web-based courses over one year. The total cost of the program is $5,000, payable when she enrolls. She will not lose any income because she can study while working. When she obtains the certification, she can expect an increase in salary of $10,000 compared to her current job, and this differential will grow at 3% per year so long as she keeps working in that new position. Second, she could enroll for an MBA. It will be an evening program, and it will cost $25,000 per year, due at the beginning of each of her three years in school. Because it is an evening program, she will not lose any income because she can study while working. When she obtains the MBA degree, she can expect a promotion to manager and an increase in salary of $20,000 compared to her current job, and this differential will grow at 3% per year so long as she keeps working in that managerial position. Using a discount rate of 2.95%, please answer the following questions: Create worksheets in Excel showing the timelines for her two alternatives. Assume that salaries are paid only once, on January 1 of the next year. Hence, when she obtains a qualification in, say, 2018, the higher salary does not kick in until 2019. Calculate the present value of the salary differential for completing the certification program. Subtract the present value of the cost of the program to get the net present value. Calculate the present value of the salary differential for completing the MBA program. Subtract the present value of the cost of the program to get the net present value. Based on your answers above, which choice would you recommend to Eugenia Monroe?

Answer 1

Hello:

Attaching the excel images used to calculate

Discounting factor is calculated using the formula 1 / ((1+ discounting factor)^n)), where n is the year

Present value = salary * discounting factor

PV of total salary = Sum of all the PV for salaries

1. Present value of the salary differential for completing the certification program -

$1,625,990.94

2. Subtract the present value of the cost of the program to get the net present value -

$1,620,990.94

3. Present value of the salary differential for completing the MBA program -

$1,876,659.91

4. Subtract the present value of the cost of the program to get the net present value -  

For this we first find the PV of MBA program cost which comes out to be = 72,871.43

$1,803,788.48

Based on your answers above, which choice would you recommend to Eugenia Monroe? - Option 2 - Go for MBA as the NPV is larger. Also we can add 75000 to the NPV(answer 2 ans answer 3) to get the exact amount today