Assume a student is planning to pursue a two-year master’s degree in computer in
ID: 397938 • Letter: A
Question
Assume a student is planning to pursue a two-year master’s degree in computer information systems. There are two educational options the student is considering, with investment and cash flows as follows. Option A: Full-Time Education Example cash investment: $100,000. Currently the student is earning $30,000. Upon graduation the student hopes to earn $60,000 per year in new job. The student will quit his/her current job. Option B: Part-Time Education Currently the student is earning $30,000. The student can work part-time for three years at a salary of $20,000 while studying towards the master’s degree in project management. Upon graduation the student anticipates a possible increase in salary by $10,000 (total $40,000) in the same company. The requirements for the assignment are: • Answer the following questions based on the unit readings: 1. Briefly describe what net present value is, how it is calculated, and what it is used for. 2. Calculate the NPV for each educational option. The discount rate is 8%. 3. Which option should the student choose? Explain your decision including any necessary assumptions made.
Explanation / Answer
1.
Net present value (NPV) is the difference between the present value of capital inflows and the present value of capital outflows over a defined duration. NPV is used to determine the best possible outcome for multiple options available for investment and return.
It is used to find the profitabilty of the projects or options available.
2.
Formula used: PV = option value for the year/ (1+rate)^ year
where (rate = 8%)
So For a horizon of 11 years option 2 is better.
But for a horizon of over 11 years option 1 is better.
Which means if the career is over 11 years option 1 is better else option 2 is better.
Assumptions are:
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Option 1 30000 -100000 0 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000 PV 30000 -92592.59259 0 47629.93446 44101.79117 40834.99182 37810.17761 35009.42372 32416.13307 30014.93803 27791.60929 25732.97156 23826.82552 22061.87548 20427.66248 18914.5023 NPV = Sum of PVs 343980.2439 Option 2 30000 20000 20000 20000 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000 PV 30000 18518.51852 17146.77641 15876.64482 29401.19411 27223.32788 25206.78508 23339.61581 21610.75538 20009.95869 18527.73952 17155.31437 15884.55035 14707.91699 13618.44165 12609.6682 NPV = Sum of PVs 320837.2078Related Questions
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