You are close before the end of your Bachelor studies and have two options: A –...

You are close before the end of your Bachelor studies and have two options:

A – Get a job at TOP Management Ltd. after finalising the Bachelor and earn a net annual salary of €25.000. B – Continue your education by adding a one-year Master degree program, and then join TOP Management Ltd. at a higher salary. The one-year Master degree program costs you €15.000. After the first year on the job in alternative A TOP Management Ltd. pays you a 10 % salary increase. However, at the same time after joining the company with a Master degree (alternative B) you would get a higher net salary of €500 per month. During your professional career over 30 years in both options you would get the identical absolute salary increases. Please assume a 6 % discount rate.

Would the investment in a longer education make sense from a NPV point of view? What is the static payback period of the investment into the Master degree ?

Expert Solution

Assume that the fee is paid at the end of the first year.

Hence the cash flows are

Year	Option A	Option B
1	25000.00	-15000.00
2	27500.00	33500.00
3	30250.00	36250.00
4	33275.00	39275.00
5	36602.50	42602.50
6	40262.75	46262.75
7	44289.03	50289.03
8	48717.93	54717.93
9	53589.72	59589.72
10	58948.69	64948.69
11	64843.56	70843.56
12	71327.92	77327.92
13	78460.71	84460.71
14	86306.78	92306.78
15	94937.46	100937.46

Year	Option A	Option B
16	104431.20	110431.20
17	114874.32	120874.32
18	126361.76	132361.76
19	138997.93	144997.93
20	152897.73	158897.73
21	168187.50	174187.50
22	185006.25	191006.25
23	203506.87	209506.87
24	223857.56	229857.56
25	246243.32	252243.32
26	270867.65	276867.65
27	297954.41	303954.41
28	327749.85	333749.85
29	360524.84	366524.84
30	396577.32	402577.32

NPV of Option A	$1,273,823.57
NPV of Option B	$1,313,016.33

Hence Option B is better since it has higher NPV.

Static payback period = 15000/ 33500

= 0.45 years

jeff jeffy answered 1 year ago

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