A prospective MBA student earns $50,000 per year in her current job and expects

Question

A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 12% per year. She is considering leaving her job to attend business school for two years at a cost of $45,000 per year. She has been told that her starting salary after business school is likely to be $85,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 11%, 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?

Explanation / Answer

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1 2 3 4 5 6 7 8 9 10 After MBA job NPV Years 0 1 2 3 4 5 6 7 8 9 A Opportunity cost of Job -50,000 -56000 Growth in Job = 12% B Cost of MBA -45000 -45000 Growth in Job after MBA =15% C Salary growth = 10% 85000 97750.00 112412.50 129274.38 148665.53 170965.36 196610.17 226101.69 D Cash flows -95,000 -101,000 85,000.00 97,750.00 112,412.50 129,274.38 148,665.53 170,965.36 196,610.17 226,101.69 E Discount Rate 11% NPV $440,771.20 NPV(E1,D2:D10)+D2 Before Job NPV 1 2 3 4 5 6 7 8 9 10 After MBA job NPV Years 0 1 2 3 4 5 6 7 8 9 A Before MBA salary 50000 56000 62720 70246.4 78675.968 88117.084 98691.134 110534.07 123798.16 138653.94 B Discount Rate 11% Growth of job =12% C NPV $520,765.00 NPV(B1,A2:A10) +A1 NPV of Better option Before MBA JOB $520,765.00

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