After graduation and having worked in the finance industry for a couple of years, you are thinking of going to get a PhD or an MBA degree to further your career. Assume no inflation. You are deciding between 2 programs: Option (1) Lakeview University: You can enroll in its world-renowned PhD program tuition-free. However, to live reasonably comfortably, you plan to spend $30,000 a year for 6 years. Upon graduation, your starting salary will be $220,000 in year 7 and will increase by 3% per year until you retire. You will work for 35 years after graduation and then retire. If you did not pursue a PhD, you would have remained working and earned $80k, $85k, \$90k, \$95k, \$100k and $105k per year respectively, from year 1 to year 6 . (This is known as the "opportunity cost"). Option (2) Metropolis University: You can enroll its famous MBA program and study for two years; the sum of tuition and living expense comes to about $130,000 per year. However, you will also have to obtain an additional certificate at the end of year 2 , which costs $5,000. Then you must renew your professional certificate every 2 years at the same $5,000 cost. Upon graduation (after 2 years), your starting salary will be $130,000 and will grow by g=4% per year. Assume you will work for 39 years after graduation. If you did not pursue the MBA, you would have remained working and earned $80k in year 1 and $85k in year 2. (This is known as the "opportunity cost"). Hint: for this exercise, please include the opportunity cost as part of "cash outflows". A. Create an Excel table listing the net cashflows per year under option 1 and option 2 for the next 41 years. B. Compute IRR for option 1 and option 2. Make sure to include the cost of the professional certificate in option 2. C. What is the NPV for studying at each of the universities? At the 8% discount rate, which option will you choose? Why? (hint- think about the IRR and NPV and what they mean) D. Plot the NPV of each option as a function of the discount rate. Assume a discount rate range of 2% to 10%, with step sizes of 0.5%. In what situation do you prefer option 1? Option 2? After graduation and having worked in the finance industry for a couple of years, you are thinking of going to get a PhD or an MBA degree to further your career. Assume no inflation. You are deciding between 2 programs: Option (1) Lakeview University: You can enroll in its world-renowned PhD program tuition-free. However, to live reasonably comfortably, you plan to spend $30,000 a year for 6 years. Upon graduation, your starting salary will be $220,000 in year 7 and will increase by 3% per year until you retire. You will work for 35 years after graduation and then retire. If you did not pursue a PhD, you would have remained working and earned $80k, $85k, \$90k, \$95k, \$100k and $105k per year respectively, from year 1 to year 6 . (This is known as the "opportunity cost"). Option (2) Metropolis University: You can enroll its famous MBA program and study for two years; the sum of tuition and living expense comes to about $130,000 per year. However, you will also have to obtain an additional certificate at the end of year 2 , which costs $5,000. Then you must renew your professional certificate every 2 years at the same $5,000 cost. Upon graduation (after 2 years), your starting salary will be $130,000 and will grow by g=4% per year. Assume you will work for 39 years after graduation. If you did not pursue the MBA, you would have remained working and earned $80k in year 1 and $85k in year 2. (This is known as the "opportunity cost"). Hint: for this exercise, please include the opportunity cost as part of "cash outflows". A. Create an Excel table listing the net cashflows per year under option 1 and option 2 for the next 41 years. B. Compute IRR for option 1 and option 2. Make sure to include the cost of the professional certificate in option 2. C. What is the NPV for studying at each of the universities? At the 8% discount rate, which option will you choose? Why? (hint- think about the IRR and NPV and what they mean) D. Plot the NPV of each option as a function of the discount rate. Assume a discount rate range of 2% to 10%, with step sizes of 0.5%. In what situation do you prefer option 1? Option 2
