A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 12% per year. She is considering leaving her job to attend business school for two years at a cost of $45,000 per year. She has been told that her starting salary after business school is likely to be $85,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 11%, and ignore all considerations not explicitly mentioned here.

Assume all cash flows occur at the start of each year (i.e., immediate, one year from now, two years from now,..., nine years from now). Also assume that the choice can be implemented immediately so that for the MBA alternative the current year is the first year of business school.

**What is the net present value of the more attractive choice?**

Please round your answer to the nearest dollar.

Let's calculate the net present value (NPV) of both options: (1) continuing in the current job and (2) attending business school. We can then compare the NPVs to determine the more attractive choice.

### Assumptions:
- Discount rate: 11%
- Time horizon: 10 years
- All cash flows occur at the beginning of each year.

### Option 1: Continuing in the Current Job

1. **Year 0 Salary**: \$50,000
2. **Salary Growth**: Increases by 12% per year.

The salary for each year can be calculated using the following formula:
\[
\text{Salary in year } n = 50,000 \times (1 + 0.12)^n
\]
We will discount each salary by 11% for the NPV calculation. The present value of the salary in year $n$ is given by:
\[
\text{PV of salary in year } n = \frac{\text{Salary in year } n}{(1 + 0.11)^n}
\]

We'll calculate this for years 0 to 9 (a total of 10 years).

### Option 2: Attending Business School

- **Business School Cost**: \$45,000 per year for 2 years (year 0 and year 1).
- **Salary After MBA**: Starting in year 2, the salary is \$85,000, increasing by 15% per year.

We can break this option into two phases:
1. **Years 0 and 1**: Business school costs (\$45,000 per year, discounted by 11%).
2. **Years 2 to 9**: The salary is \$85,000 in year 2, increasing by 15% per year.

The NPV of the business school option is the sum of the discounted costs and the discounted salaries over the 10-year period.

Now let's calculate both NPVs.The net present value (NPV) of continuing in the current job is \$520,765, while the NPV of attending business school is \$541,222. The more attractive choice is to attend business school, with an NPV that is \$20,457 higher.

Would you like more details on how the calculations were done or have any other questions?

Here are 5 questions to expand this topic:
1. How does the discount rate affect the NPV in these calculations?
2. What would happen if the salary growth in the current job were higher?
3. How does increasing the cost of business school impact the MBA NPV?
4. What if the MBA starting salary were lower—how would that change the outcome?
5. What is the impact of extending the time horizon beyond 10 years?

**Tip:** When comparing investments or opportunities over time, NPV is a powerful tool because it accounts for the time value of money, making future cash flows comparable to today’s values.

A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 12% per year. She is considering leaving her job to attend business school for two years at a cost of $45,000 per year. She has been told that her starting salary after business school is likely to be $85,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 11%, and ignore all considerations not explicitly mentioned here. Assume all cash flows occur at the start of each year (i.e., immediate, one year from now, two years from now,..., nine years from now). Also assume that the choice can be implemented immediately so that for the MBA alternative the current year is the first year of business school. What is the net present value of the more attractive choice? Please round your answer to the nearest dollar.

Calculate the net present value (NPV) of staying in a current job versus attending business school. Explore key concepts like the time value of money, salary growth rates, and discounting cash flows with a detailed analysis over a 10-year period.

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