# Assume today is June 1, 2009.

Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science. She is currently employed as a Tier 2 field service representative for a telephony corporation located in Seattle, Washington, and earns, $38,000 a year that she anticipates will grow at 3% per year. Natasha hopes to retire at age 65 and has just begun to think about the future. Natasha has $75,000 that she recently inherited from her aunt. She invested this money in 10-year Treasury Bonds. She is considering whether she should further her education and would use her inheritance to pay for it. She has investigated a couple of options and is asking for your help as a financial planning intern to determine the financial consequences associated with each option. Natasha has already been accepted to both of these programs and could start either one soon. One alternative that Natasha is considering is attaining a certification in network design. This certification would automatically promote her to a Tier 3 field service representative in her company. The base salary for a Tier 3 representative is $10,000 more than what she currently earns and she anticipates that this salary differential will grow at a rate of 3% a year as long as she keeps working. The certification program requires the completion of 20 Web-based courses and a score of 80% or better on an exam at the end of the course work. She has learned that the average amount of time necessary to finish the program is one year. The total cost of the program is $5,000, due when she enrolls in the program. Because she will do all the work for the certification on her own time, Natasha does not expect to lose any income during the certification. Another option is going back to school for an MBA degree. With an MBA degree, Natasha expects to be promoted to a managerial position in her current firm. The managerial position pays $20,000 a year more than her current position. She expects that this salary differential will also grow at a rate of 3% per year for as long as she keeps working. The evening program, which will take three years to complete, costs $25,000 per year, due at the beginning of each of her three years in school. Because she will attend classes in the evening, Natasha doesn't expect to lose any income while she is earning her MBA if she chooses to undertake the MBA.

1) Determine the interest rate she is currently earning on her inheritance by going to Yahoo

Finance (http://finance.yahoo.com) and clicking on the 10-year bond link in the market summary. Then go to “Historical Prices” and enter the appropriate date, June 1. 2009, to obtain the closing yield or interest rate that she is earning. Use this interest rate as the discount rate for the remainder of this problem. 2) Create a timeline in Excel for her current situation as well as the certification program and MBA degree options using the following assumptions:

63 63369.33478 44052.2 61.41482 67228.• •
Salaries for the year are paid only once. what advice would you give to Natasha? What if the two programs are mutually exclusive?—if Natasha undertakes one of the programs there is no further benefit to undertaking the other program. 2) Timeline in Excel Natasha current situation as well as the certification program and MBA
degree options. because the increases become effective immediately but salaries are paid at the end of the year.72985 MBA 38000 39140 40314.72801 58675.38309
. the first salary increase will be paid exactly one year after graduation or certification. 4) Calculate the present value of the salary differential for completing the MBA degree.
3) Calculate the present value of the salary differential for completing the certification program.52727 69245. That is.50292 56966. 2009 is 3. Based on your calculations. 5) Based on your answers to Questions 3 and 4.60478 55307. Calculate the present value of the cost of the MBA program. determine the NPV of undertaking the MBA.2 41523.523.98727 46735.71%.626 53696.33478 65270. Would your advice be different?
Answer:
1) After we search from Yahoo.20689 Certification 38000 49140 50614. Subtract the cost of the program to get the NPV of undertaking the certification program.626 42769. Option Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Current job 38000 39140 40314. at the end of the year The Salary increase becomes effective immediately upon graduating from the MBA program or being certified.41482 45373. the interest rate for June 1.2 52132.

51885 78855.74458 73462.26309 49581.8643 128816.754 140761.19372 72811.55425 66040.56063 86167.2475 105974.1417 112428.25168 89549.6778 122853.92954 74996.04116 99891.28872 80274.5121 114452.46817 84408.40954 59202.38099 51068.0818 64116.25241 70061.97391 95003.17605 79563.08696 87717.80466 98727.32151 96982.28745 88752.27442 81220.88709 54178.00175 62249.56133 81950.6087 85163.37738 82682.93265 83657.21003 64692.6295 121422.29972 77936.76183 60978.97957 90349.0506 111118.87525 94157.3588 101689.98221 86941.22692 70691.88998 72163.74668 74328.Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Year 27 Year 28 Year 29 Year 30 Year 31 Year 32 Year 33
48137.28742 77246.05312 97853.84469 62808.766 115801.14472
60436.0675 117885.8949 109154.9482
71322.28111 57478.82242 52600.8103 132681.4548
.1984 125064.23002 68632.3146 136661.9137 55804.629 119275.51895 93060.05088 68021.8549 107882.00452 95851.65908 76558.50239 102888.6066 144984.1796 104739.42692 75666.48923 92235.45633 66633.30607 91414.

143. if Natasha used $5.642.426. to value Natasha fortune.7391 103812. The pay differential will take effect upon completion of the MBA. NPV=$75.000 more than her current pay and the salary will increase by 3% a year.696.97 4) Option 3: Attaining a MBA: Under this option Natasha will earn $20.569. NPV=$1. To calculate Natasha fortune under this option.000 payable at the beginning of the program.218.9 7 70000 $1.Year 34 Year 35 PV for expected salaries
100788. compute the expected salaries. Natasha still have $70.97+$70000=$1. she will earn $10. But the MBA program will cost $25.820.000+ $1.162.22 Under Option 1. effectively at the end of year 4.696. PV of expected salaries or future cash flows under this option: PV= $1.820. Like above.4012 $1.143.9 7
149333.426.7536 $1.000 to the PV of future salaries to find Natasha wealth as today. you need to calculate the PV of her expected salaries or cash flows.03) $1. Under this option.696. The certification program lasts for one year.5666 130335.
.820.218.60
($72.9885 153814.496.496.22 = $1.22 3) Option 2: Attaining a Certification: If Natasha receives a certification. Natasha will start earning $38.696.000 and her salary will increase by 3% a year as Natasha intends to work for 35 years.2 2 75000
126539.813.97 Under Option 2.000 more than what she is currently earning.2 2
Option 1: Natasha can decide to remain in her current job. thus after 3 years.57
NPV
$1.000 to be added to the PV of future salaries.143.000 to pay for certification.349. that is $48.820.820.000 a year and the program will last for 3 years.426. PV of expected salaries or future cash flows under this option: PV=$1.696.0081 $1. add the $75. But the certification will cost $5.000 and the salary will increase 3% a year.

162.$72.349.349.162.642. PV of expected salaries or future cash flows under this option: PV=$1.03 NPV = PV of expected salaries – PV of cost of MBA = $1. Then we need to find the NPV = PV of expected salaries – PV of cost of MBA.60 .642.60 PV of cost of MBA=$72. We also need to find the PV of the cost of the MBA program as costs are paid at the beginning of each of the 3 years.57 5)
.To evaluate the Natasha’s fortune under this option. we need to compute the PV of Natasha expected salaries or cash flows.03 = $1.569.813.