Au-Finc 501 - TVM - Case Study - 2015

Ahlia University
MBA Program
FINC 501
TVM: CASE STUDY

Assume today is May 30, 2014. Natasha Kingery is 30 years old and has a
Bachelor of Science degree in computer science. She is currently
employed as 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 $5000, 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 marker summary. Then
go to "Historical Prices" and enter the appropriate date, May 30,
2014, to obtain the closing yield or interest rare 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:
Salaries for the year are aid only once, at the end of the year.
The salary increase becomes effective immediately upon 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 one of the programs there is no further
benefit to undertaking the other program. Would your advice he
different?
If Natasha lacked the cash to pay for her tuition up front, she could borrow
the money. More intriguingly, she could sell a fraction of her future
earnings, an idea that has received attention from researchers and
entrepreneurs; see Miguel Palacios, Investing in Human Capital; A Capital
Markets Approach to Student finding Cambridge University Press, 2004.

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TVM: CASE STUDY

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