You are about to graduate and are wondering what career to pursue. You have narr
ID: 1195981 • Letter: Y
Question
You are about to graduate and are wondering what career to pursue. You have narrowed the choice to three alternatives:
a. Go to work as a junior-level executive and work your way up.
b. Go to business school, get an MBA, and work as an executive then.
c. Go to graduate school, get a PhD in economics (eventually), and teach as a university professor.
You face the following expected cost and return streams. Assume each period is of equal length. [Although this example is a bit simple-minded, it captures the choices quite well.] Time 1 Time 2 Time 3 Time 4 Option A 30,000 34,000 38,000 42,000 Option B -20,000 50,000 60,000 80,000 Option C -10,000 -10,000 30,000 41,000
a. Calculate the net present value of each choice, assuming
i. an interest rate of 10%, and
ii. an interest rate of 20%.
Show your calculations.
b. Why might someone choose Option C?
Explanation / Answer
PV for Year 1 = Cashflow / (1 + Interest rate)Year
A person may choose option C for other factors like interest in academic research, better work-life balance offered as a professor etc.
Option A PV(10%) PV(20%) 1 30000 27272.73 25000 2 34000 28099.17 23611.11 3 38000 28549.96 21990.74 4 42000 28686.57 20254.63 NPV 112608.4 90856.48Related Questions
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