Assume that today is August 1, 2012. Natasha is 30 years old and has a Bachelor
ID: 2765723 • Letter: A
Question
Assume that today is August 1, 2012. Natasha 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 locate in Seattle, WA, 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 Treasure 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 the salary differential will grow at a rate of 3% a year for as long as she remain 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 $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 expects 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 managerial position pays $20,000 a year more than the 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.
1) Determine the interest rate Natasha is currently earning on her inheritance by going to Yahoo!Fianance and clicking the 10 Yr Bond link in the Market Summary section. Then go to the historical prices link and enter the appropriate 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. THE ANSWER THAT I GOT FOR THIS PART IS 1.54
2) What is the present value of the salary differential for completing the certification program?
3) What is the net present value of undertaking the certification program? (You subtract the cost of the program from the answer in the previous question to get the net present value).
4) What is the present value of the salary differential for completing the MBA degree?
5) What is the net present value of undertaking the MBA? (You subtract the cost of the program from the answer in the previous question to get the net present value).
Explanation / Answer
1.Interest rate=1.54
2.Present value of sal differential=sal after promotion -sal after one year
=$48000-39140
=$8860
3.NPV under taking certification programme=8860-5000
=$3860
NPV=-$1198.54
4.sal differential for MBA programme=sal after promotion -sal after one year
=(38000+25000)-39140
=$23860
5.NPV =-$1501.87