Describe Decision making based on NPV of capital project
Assume today is August 1, 2006. Natasha Kingery is 30 years old and has a Bachelor of Sci-ence degree in computer science. She is currently employed as a Tier 2 field service rep-resentative 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 thai 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 rhe 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 cur¬rently 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 V/eb-based courses and a score of 80% or better on an exam at the end of the course work. She has learned thar rhe average amount of time necessary to finish the program is one year. The total cose 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 nor expect no 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.
If Natasha lacked the cash to pay for her tuition up from, she could borrow the money. More intriguingly, she could sell a fraction of her future earnings, an idea that has received atcemton from researcher, and entrepreneurs; see Miguel Palados, Investing m Human Capital: A Capital Markets Approach to 5tu-dent Funding, Cambridge University Press, 2004.
Natasha 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 rake 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.
a. Calculate the present value of the salary differential for completing the certification pro-gram. Subtract the cost of the program to get the NPV of undertaking die certification program.
b. Calculate the present value of the salary differential for completing the MBA degree. Cal-culate the present value of the cost of the MBA program. Based on your calculations, determine the NPV of undertaking the MBA.
c. 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 pro¬grams there is no further benefit to undertaking the other program. Would your advice change?