Read the instructions carefully and complete all work in detail.

Week 2 Discussion - Student Posts: Write a response to each of these two discussion posts, one response for discussion #1 and one response for discussion #2. Make sure each response is half page long so in total it must be one page worth of discussion response.

Discussion #1:

Question 1: Make some reasonable assumptions about (a) the monetary investment in your MBA, (b) the additional income you expect to have due to your MBA, (c) the number of years that you expect to work after you get your MBA, and (d) a proper discount rate. What is the NPV of your MBA? This is a difficult question, and it is one that I asked myself just last year, when I decided to go back to school to get my MBA.  I’ll be completely honest, that I did not really think about the costs long term until I needed to figure out this set of questions.  I thought about the initial costs, and the salary that I was looking for based on comparable people with similar degrees and experience, however I did not think about what the extra lifetime costs would have been.  When looking at the cost basis of what everything will cost me versus my expected difference in lifetime earnings, we arrive at this formula: =$1,656,850 This tells me that the NPV of my Masters Degree is $1,656,850.  This number is positive, and therefore telling me that it is worth it to pursue my degree.  Here is a breakdown of the numbers: For all numbers, I used rounded whole numbers, as these are estimates based on future earnings: Additionally, here is a breakdown of the variables: I started with a base salary of $100,000.  From there, for C  I added $100,000 one time, and then $100,000 with a 5% increase for years 2-10, and then $100,000 with a 2.5% increase for years 11-30.   A: IO: I expect that my MBA will cost me approximately $40,000 over the number of years that I am there.  Additionally, I factored in the interest of loans, over the repayment period.  I did it for the longest period possible, 10 years, at 7.5% interest, which got me a sum of $56,975. B: C: Additional income is rather tough to gauge.  Based on my expected additional income, I expect to make approx an additional 5% for years 2-10, and an additional 2.5% for years 11-30.  I figure that 2.5% additional per year is an average raise for most people. C: n:  I am currently 29, turning 30 this year, and I plan to work until I am 60, so I figured that I will be working for the next 30 years.   D:  r: For the discount rate, I chose to go with the NYSE Rate of Return since 2002 of 7.2%.  I choose this rate, as that would be the opportunity cost rate of not investing in the market for the past 10 years.  When choosing the discount rate, you want to look at what this will cost you based on what you can gain by not doing it.   Based upon these numbers, I will continue to pursue my MBA, because the NPV is positive.  Additionally, looking at the expected lifetime earnings of Masters versus Bachelors degrees, it pays to have a masters. http://www.usnews.com/education/best-colleges/articles/2011/08/05/how-higher-education-affects-lifetime-salary http://observationsandnotes.blogspot.com/2009/03/average-annual-stock-market-return.html Question 2: A university plans to have a new library building equipped with the latest technology, study rooms for the students, and more space for books and periodicals. The old building is too small and does not have any equipment. Can you justify the new building in terms of its NPV? To justify the cost of a new building, you need to look at what that new building is going to bring the university in terms of additional revenues.  How we can justify the additional revenues is by how many additional students are going to attend based on the fact that the university has a state of the art library.  Additionally, we need to look at the opportunity cost of building that new library versus for example a larger football stadium. Additionally, with the larger newer library, is it really needed, especially with everything going digital?  For example, my office is my study area, and I use the electronic reserves when I need to research anything.  Gone are the days of the card catalog...remember those?  All of the lookup systems are digital, and do not require a ton of computing horsepower to run that database.  Expanded books and periodicals are not really all that necessary with digital versions, so the expanded space is not really necessary for storage.  Personally, even when I was attending a physical campus, I really did not use the library all too much.  I used the electronic reserves, and used the student center or Starbucks when I needed to study.  So if a university told me that they had a state of the art library, it would be a zero variable as to whether I wanted to attend there.  Therefore for me and students like me, there would be no additional revenues to the university based on the new library.  Therefore, the library construction would have a negative NPV, and not worth construction. Looking at new buildings based on NPV, for a university, is a tough task to accomplish.  A vast majority of the resources that universities construct are more of a “Keeping Up with the Jones’” mentality, in my humble opinion.  Universities need to compete for students enrollment, and the way that they do it is by providing a better education, better faculty, better resources, and better campuses.  Additionally, the universities reputation is extremely important.  For example, I choose to attend Scranton, based on the 8-week class schedule, and the social responsibility based on Jesuit education, with Scranton being one of the 28 Jesuit universities in the US.   Looking at this choice solely based on NPV, I would say that the new library would not be advantageous to build right now.  Twenty years ago, I would have said yes, however looking at the expected life of the library of say 50 years, and it bringing in marginal revenues only, it does not seem like a good place to put that large of a sum into.  

Discussion #2:

Question 1: Make some reasonable assumptions about (a) the monetary investment in your MBA, (b) the additional income you expect to have due to your MBA, (c) the number of years that you expect to work after you get your MBA, and (d) a proper discount rate. What is the NPV of your MBA?

The equation I will use is NPV = − I0 + ΣC/(1 + r)^

I need to find the following: initial investment, after-tax annual earnings for , expected time of work, and the risk-adjusted discount rate

1. A.      My initial investment is $37,000(cost of tuition) +$1,500(cost of books) - $15,000(employee-sponsored payment) =$23,500 with 5% interest over 10 year period my I0 = about $30,000

2. B.      My after-tax annual earnings after I earn my MBA degree is based on a 20% salary increase for MBA graduates. To use round numbers, if I were to make $100,000 after earning my degree, I would also continue to earn my company’s 3% pay increase per year. However, my pre-MBA salary would be at $80,000 according to these numbers.

3. n = I expect to work for another estimated 30 years

4. r = this represents the risk-adjusted discount rate for the cash flows. I will use 10% as my rate

Using WolframAlpha my calculation is: NPV = -30000+∑ [(100000*1.03^i)/1.10^i,{i,1,30}]

NPV with an MBA = $1,236,750

The outcome of the NPV with earning an MBA makes it seem worth the time and money now. The calculation does not take into account any other benefits that may come with an MBA such as promotions, bonuses, etc. In addition to the monetary benefits of earning an MBA, the knowledge acquired improves my current skills and expands into areas that I would not otherwise have the opportunity of learning.

Question 2: A university plans to have a new library building equipped with the latest technology, study rooms for the students, and more space for books and periodicals. The old building is too small and does not have any equipment. Can you justify the new building in terms of its NPV?

The new building can certainly be justified in terms of its NPV. Just like calculating the NPV of my MBA degree, the same methodology can be applied to this scenario. The university will need to calculate the estimated investment of the building. This calculation should include all costs associated with fully finishing the building. Next the University can estimate the additional income it may receive from this new building. With the new building and space, more students may now be able to enroll and the University will need to factor how many more students per year it will allow and use their tuition as the expected additional income from this new building. Life of the project in years will need to be determined plus the risk-adjusted discount rate for the cash flows. Once all this is determined, the University can use the formula to calculate the NPV.