A prospective MBA student earns 55000 per year in her curren

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 choice? Please round your answer to the nearest dollar.

Solution

If prospective MBA student leaves her job for more attractive choice (i.e. joining business school and earn $100,000 per year after that), then there will be an opportunity cost of salary that she would have earned from the current job.There is also a cost of study in Business School for first two years and there will be a cash inflow of salary after business school (i.e. for 8 years after business school). The calculation net present value is shown as follows:-

Therefore the net present value of more attractive choice is $60,284.