Assume today is June June 1, 2009. Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science. She is currently employed employed as a Tier 2 field 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 inherited from her aunt. She invested this money in 10-year Treasury Bonds. Bonds. She is considering whether she should should further her education and would use her inheritance to pay for it. She has investigated a couple coup le of options and is asking for your help h elp as a financial planning intern to determine the financial 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 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 better on an exam at the end of the the course work. She has learned that the average amount of time necessary to finish the program is is one year. The total cost of the the program is $5,000, due when she enrolls enrolls in the program. Because she will do all the 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 school for an MBA degree. With an MBA degree, Natasha expects to be promoted to a managerial position in her current current firm. The managerial position pays $20,000 a year more more than her current position. position. She expects that this salary salary differential will also grow at a rate of 3% per year for 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 years in school. Because she will attend classes 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 (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 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 Create a timeline timeline in Excel for her current current situati situation on as well as the certifi certificatio cation n program and MBA degree options using the following assumptions:
•
•
Salaries for the year are paid only once, at the end of the year The Salary increase becomes effective immediately upon graduating from the MBA program or being certified. That is, because the increases become effective immediately but salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification.
3) Calculate the present value of the salary differential for completing the certification program. Subtract the cost of the program to get the NPV of undertaking the certification program. 4) Calculate the present value of the salary differential for completing the MBA degree. Calculate the present value of the cost of the MBA program. Based on your calculations, determine the NPV of undertaking the MBA. 5) Based on your answers to Questions 3 and 4, what advice would you give to Natasha? What if the two programs are mutually exclusive?—if Natasha undertakes on e of the programs there is no further benefit to undertaking the other program. Would your advice be different?
Answer: 1) After we search from Yahoo, the interest rate for June 1, 2009 is 3.71%. 2) Timeline in Excel Natasha current situation as well as the certification program and MBA
degree options. Option
Current job
Certification
MBA
Year 1
38000
38000
38000
Year 2
39140
49140
39140
Year 3
40314.2
50614.2
40314.2
Year 4
41523.626
52132.626
61,523.63
Year 5
42769.33478
53696.60478
63369.33478
Year 6
44052.41482
55307.50292
65270.41482
Year 7
45373.98727
56966.72801
67228.52727
Year 8
46735.20689
58675.72985
69245.38309
Year 9
48137.26309
60436.00175
71322.74458
Year 10
49581.38099
62249.0818
73462.42692
Year 11
51068.82242
64116.55425
75666.29972
Year 12
52600.88709
66040.05088
77936.28872
Year 13
54178.9137
68021.25241
80274.37738
Year 14
55804.28111
70061.88998
82682.6087
Year 15
57478.40954
72163.74668
85163.08696
Year 16
59202.76183
74328.65908
87717.97957
Year 17
60978.84469
76558.51885
90349.51895
Year 18
62808.21003
78855.27442
93060.00452
Year 19
64692.45633
81220.93265
95851.80466
Year 20
66633.23002
83657.56063
98727.3588
Year 21
68632.22692
86167.28745
101689.1796
Year 22
70691.19372
88752.30607
104739.8549
Year 23
72811.92954
91414.87525
107882.0506
Year 24
74996.28742
94157.32151
111118.5121
Year 25
77246.17605
96982.04116
114452.0675
Year 26
79563.56133
99891.50239
117885.6295
Year 27
81950.46817
102888.2475
121422.1984
Year 28
84408.98221
105974.8949
125064.8643
Year 29
86941.25168
109154.1417
128816.8103
Year 30
89549.48923
112428.766
132681.3146
Year 31
92235.97391
115801.629
136661.754
Year 32
95003.05312
119275.6778
140761.6066
Year 33
97853.14472
122853.9482
144984.4548
Year 34
100788.7391
126539.5666
149333.9885
Year 35
103812.4012
130335.7536
153814.0081
PV for expected salaries
$1,143,820.2 2
$1,426,696.9 7
$1,642,162.60
75000
70000
($72,349.03)
$1,218,820.2 2
$1,496,696.9 7
$1,569,813.57
NPV
Option 1: Natasha can decide to remain in her current job. Under this option, Natasha will start earning $38,000 and her salary will increase by 3% a year as Natasha intends to work for 35 years. To calculate Natasha fortune under this option, you need to calculate the PV of her expected salaries or cash flows. PV of expected salaries or future cash flows under this option: PV= $1,143,820.22 Under Option 1, add the $75,000 to the PV of future salaries to find Natasha wealth as today. NPV=$75,000+ $1,143,820.22 = $1,218,820.22 3) Option 2: Attaining a Certification: If Natasha receives a certification, she will earn $10,000 more than what she is currently earning, that is $48,000 and the salary will increase 3% a year. But the certification will cost $5,000 payable at the beginning of the program. The certification program lasts for one year. Like above, to value Natasha fortune, compute the expected salaries. PV of expected salaries or future cash flows under this option: PV=$1,426,696.97 Under Option 2, if Natasha used $5,000 to pay for certification, Natasha still have $70,000 to be added to the PV of future salaries. NPV=$1,426,696.97+$70000=$1,496,696.97 4) Option 3: Attaining a MBA: Under this option Natasha will earn $20,000 more than her current pay and the salary will increase by 3% a year. But the MBA program will cost $25,000 a year and the program will last for 3 years. The pay differential will take effect upon completion of the MBA, thus after 3 years, effectively at the end of year 4.
To evaluate the Natasha’s fortune under this option, we need to compute the PV of Natasha expected salaries or cash flows. 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. Then we need to find the NPV = PV of expected salaries – PV of cost of MBA. PV of expected salaries or future cash flows under this option: PV=$1,642,162.60 PV of cost of MBA=$72,349.03 NPV = PV of expected salaries – PV of cost of MBA = $1,642,162.60 - $72,349.03 = $1,569,813.57 5)
