Question

In: Finance

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 ?

Solutions

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


Related Solutions

Futures and Options You have to make a 90,000,000 payment in Japanese Yen on close of...
Futures and Options You have to make a 90,000,000 payment in Japanese Yen on close of business day, Friday, September 11th. You decide to hedge your risk with the futures contracts. Assume you that you enter into the futures position at a close of day on Tuesday, September 8th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 12,500,000 yen. Describe the position you decide to enter (long or short). Describe the contract (what month, and...
You own a car rental company, and you have two options to replace your fleet. For...
You own a car rental company, and you have two options to replace your fleet. For each car, you can either enter into a five-year lease for $7,000 per year (pretax) or you can purchase the car for $30,000. You believe the cars will last for 8 years and be worth $4,000 at the end of the 8 years. The lease payments cover maintenance costs, but if you buy the cars, you will pay $1,200 per year (pre-tax) for a...
Suppose you have two offers to start work after finishing your studies, which will be in...
Suppose you have two offers to start work after finishing your studies, which will be in one year and you have to choose between the two. However, the two positions and their location points are indifferent to you, as they both include the same benefits package. Job A will produce an annual salary of $ 24,000 starting a year from now and Job B will pay an annual salary of $ 25,000. No salary will be adjusted until you complete...
Problem Four: (10%) You have won the lottery! You were offered two options to claim your...
Problem Four: (10%) You have won the lottery! You were offered two options to claim your prize: Option One: You will collect a payment of $12,000 at beginning of each year for 10 years, then a final payment of $20,000 will be made at the end of year 10. Option Two: You will be offered a payment of $7,000 at the end of each year for 5 years, then a payment of $8,000 at the end of each year for...
You need a large-size mixing tank in your ready meal production plant. You have two options:...
You need a large-size mixing tank in your ready meal production plant. You have two options: i) Buy the aluminum reactor with an initial cost of $200,000 and a useful lifetime of 10 years. The salvage value at the end of the 10th year would be $10,000. ii) Buy a stainless steel reactor with an initial cost of $300,000 and a useful lifetime of n years. The salvage value at the end of the nth year would be $20,000. For...
You and your team have completed your fieldwork and have a handful of other considerations before...
You and your team have completed your fieldwork and have a handful of other considerations before you compete the audit and issue your report. These activities are designed to ensure nothing significant has occurred between the completion of your fieldwork and the issuing of the audit report. You are assigned as a senior on the staff, in line to be promoted to manager, to instruct the other staff on the importance of considering contingent liabilities, letters from client lawyers, and...
You have to choose between two options using   PI (profitability index) as your project evaluation tool....
You have to choose between two options using   PI (profitability index) as your project evaluation tool. The company use a 15% discount rate The project “A” needs $25,000 for initial investment and will produce in 3 years $18,000 per year. The project “B” needs $50,000 for initial investment and will produce in 3 years $35,000 per year
You have been assigned to an ICT firm for your attachment studies and as a result,...
You have been assigned to an ICT firm for your attachment studies and as a result, required to learn and aid in some basic IT-related activities.i. As part of your first task, your supervisor requests you to aid with the development of a bank ticketing system that ensures the first time and already admitted customers are served according to a predefined preference as shown below. Write an algorithm that would ensure customers can be awarded tickets and served based on...
Two call options and two put options on a stock have the same expiration date and...
Two call options and two put options on a stock have the same expiration date and two strike prices of $187.5 (K1) and $262.5 (K2). The market prices of the call options are $90.5 (c1) and $13.88 (c2), and the market prices of the put options are $2.1 (p1) and $77.5 (p2), respectively. (a) Explain how a long strangle can be created. (b) Construct a profit (loss) table for the long strangle strategy at expiration of the options. (c) Draw...
YOU have graduated from Deakin with a Bachelor of Commerce and started work with a mid-sized...
YOU have graduated from Deakin with a Bachelor of Commerce and started work with a mid-sized accounting practice in Melbourne, working in the Accounting and Tax team. Standards are high. To move ahead in your career you must not only work hard and effectively you must also demonstrate cultural fit. This was easy during recruitment as the firm promoted itself as “top class people, doing top class work, with top class standards”. You were expecting that the firm would do...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT