A prospective MBA student earns $45,000 per year in her current job and expects
ID: 2616433 • Letter: A
Question
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.
Explanation / Answer
Calculation of Cash Flows from both option either to continue present job or do new one after doing MBA:
Cash Flow from present job grew by 6% like for Year 1 (45000 + 45000*6%) = 47,700 so on
Cash Flow from new alternative grew by 16% like for Year 3 (90000 + 90000*16%) = 104,400
Cash Flow from Current Job
Cash Flow from Alternative Option
0
45000
-30000
1
47700
-30000
2
50562
90000
3
53595.72
104400
4
56811.46
121104
5
60220.15
140480.64
6
63833.36
162957.54
7
67663.36
189030.74
8
71723.16
219275.66
9
76026.55
254359.77
Present Value of Current Job (Discount rate 9%) = $ 398,166
Present Value of New Alternative (Discount Rate 9%) = 703,674
Cash Flow from Current Job
Cash Flow from Alternative Option
0
45000
-30000
1
47700
-30000
2
50562
90000
3
53595.72
104400
4
56811.46
121104
5
60220.15
140480.64
6
63833.36
162957.54
7
67663.36
189030.74
8
71723.16
219275.66
9
76026.55
254359.77
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