Assume today is June 1, 2009.

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 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 $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 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 market
summary. Then go to “Historical Prices” and enter the appropriate date, 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 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 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 one 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 $1,143,820.2 $1,426,696.9 $1,642,162.60

expected 2 7
salaries

75000 70000 ($72,349.03)

NPV $1,218,820.2 $1,496,696.9 $1,569,813.57

2 7

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)