Question

A prospective MBA student earns $55,000 per year in her current job and expects that amount to increase by 7% per year. She is considering leaving her job to attend business school for two years at a cost of $40,000 per year. She has been told that her starting salary after business school is likely to be $100,000 and that amount will increase by 10% per year. Consider a time horizon of 10 years, use a discount rate of 13%, 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 alternative?
Please round your answer to the nearest dollar.

Answer 1

The net present value of the more attractive alternative is the MBA alternative which is = $ 495,894

Step-by-step explanation:

Solution

Recall that:

An MBA student earns = $55,000 per year on her present job

The expected amount increase = 7%

She considers leaving her job to attend business school at cost of =$40,000

Starting salary after business school= $ 100,00

Per year increment of amount = 10%

Number of years = 10

Discount rate = 13%

Now,

The present Net value of the present Job alternative = $ 435,568.05

or 435,568

Thus,

The present Net value of the MBA alternative = $ 495,893.60

or $495,894

So,

The present Net value of the MBA alternative is more than that of the current job alternative.

Hence, the net present value of the more attractive alternative = MBA alternative = $ 495,894

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