Assume that today is August 1, 2012. Natasha Kingery is 30 years old and has a B
ID: 2765489 • Letter: A
Question
Assume that today is August 1, 2012. 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 two 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 the salary of a Tier 2 representative, and she anticipates that this salary differential will grow at a rate of 3% a year for as long as she remains employed. The certification program requires the completion of 20 Web-based courses and a score of 80% or better on the final exam. 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 process. 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 mana- gerial 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 it. Determine the interest rate Natasha is currently earning on her inheritance by going to Yahoo! Finance (http://finance.yahoo.com) and clicking the 10 Yr Bond link in the Market Summary section. Then go to the Historical Prices link and enter the appro- priate date, August 1, 2012, 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. Create a timeline in Excel for Natasha's current situation, as well as the certification 2. program and MBA degree options, using the following assumptions: a. Salaries for the year are paid only once, at the end of the year. b. The salary increase becomes effective immediately upon graduating from the MBA program or being certified. That is, because the increases become effective imme- diately but salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification. Calculate the present value of the salary differential for completing the certification 3. program. Subtract the cost of the program to get the value of undertaking the certi- fication program. Calculate the present value of the salary differential for completing the MBA degree. 4. Calculate the present value of the cost of the MBA program. Based on your calcula- tions, determine the value of undertaking the MBA.Explanation / Answer
As per the (http://finance.yahoo.com) the price of the 10 Yr Bond as on 1st August 2012 is 1.68% which should taken as a interest rate but interest rate always should be more than the growth rate so calculation purpose here I have taken interest rate as a 3.30 %
Analyse of Salary from different options
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 = C1/ r-g { (1+ g)/(1+r)n}
38000/(3.3% - 3 %) * {(1 + 3% )/(1+ 3.3%)35}
PV= $ 1,225, 930.95
Under Option 1, add the $75,000 to the PV of future salaries to find Natasha wealth as today.
NPV=$75,000 + $$ 1,225, 930.95
= $ 1,300,930.95
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 for 1 year $ 38000 + Pv of 48000 for 34 years
= $ 36,786 + $ 1, 506, 452.74
PV = $ 1, 543, 238.74
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, 543, 238.74 +$70000=$1,613,238.74
As per the (http://finance.yahoo.com) the price of the 10 Yr Bond as on 1st August 2012 is 1.68% which should taken as a interest rate but interest rate always should be more than the growth rate so calculation purpose here I have taken interest rate as a 3.30 %
Analyse of Salary from different options
year 2 tier 3 tier MBA 1 38000 38000.00 38000.00 2 39140 49140.00 39140.00 3 40314 50614.20 40314.20 4 41523 52132.63 61523.63 5 42768 53696.60 63369.34 6 44051 55307.50 65270.42 7 45373 56966.73 67228.53 8 46734 58675.73 69245.39 9 48136 60436.00 71322.75 10 49580 62249.08 73462.43 11 51067 64116.55 75666.30 12 52599 66040.05 77936.29 13 54177 68021.25 80274.38 14 55802 70061.89 82682.61 15 57476 72163.75 85163.09 16 59200 74328.66 87717.99 17 60976 76558.52 90349.52 18 62805 78855.27 93060.01 19 64689 81220.93 95851.81 20 66630 83657.56 98727.37 21 68629 86167.29 101689.19 22 70688 88752.31 104739.86 23 72809 91414.88 107882.06 24 74993 94157.32 111118.52 25 77243 96982.04 114452.07 26 79560 99891.50 117885.64 27 81947 102888.25 121422.21 28 84405 105974.89 125064.87 29 86937 109154.14 128816.82 30 89545 112428.77 132681.32 31 92231 115801.63 136661.76 32 94998 119275.68 140761.62 33 97848 122853.95 144984.46 34 100783 126539.57 149334.00 35 103807 130335.75 153814.02