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The MBA Decision
1. Ben's age affects his decision to get an MBA because the MBA increases his annual earnings. The incremental financial benefit of the MBA will amount to more money, the longer Ben's remaining working career is. Thus, the younger Ben is, the more benefit he will get from obtaining an MBA.
2. There are some nonquantifiable factors that Ben may wish to take into account. For example, he might look at his current family situation – he may have a baby on the way, sick parents, or some other factor that might cause his to delay the MBA or to change his plans to go away. He might be able to work with his current company to achieve an MBA part-time, which would allow him to obtain the degree without career disruption. Ben might also want to examine if the MBA supports his goal. Because he wants to be an investment banker, it does, but there are many fields for which there would be limited benefit to obtaining an MBA.
3. Ben is faced with three options. The way to examine these options is to run a net present value calculation, weighing the incremental cash flows of these options. The one with the highest present value of future cash flow is the one that...
Ben is incorrect. The future value is not the correct approach. The net present value is. The reason for this is that the future value is going to skew towards larger numbers at the end of the period. The further away from t=0, the less reliable those numbers are, and the more steeply discounted they need to be. By not discounting those numbers, Ben is going to skew his analysis significantly.
5. This can be tested with trial and error, but is essentially the point at which his current salary would, plugged into the calculation, yield the same NPV as the Ritter MBA. This is easily done using the solver function in Excel. That salary is $84,555.08.
6. If Ben has to finance his MBA, that would definitely influence his decision, because it adds an incremental cost to the decision to pursue the MBA. This would reduce the net present value of either MBA. There is not enough information provided about the repayment terms (e.g. repayment…
"MIRR: A better measure." Business Horizons. 51(4), 321-329. Cited in: http://econpapers.repec.org/article/eeebushor/v_3a51_3ay_3a2008_3ai_3a4_3ap_3a321-329.htm McClure, B. (n.d.). "Taking Stock of Discounted Cash Flow." Investopedia. Cited in: http://www.investopedia.com/articles/03/011403.asp?partner=answers "Modified Internal Rate of Return." (2009). Cited in: http://www.thinkanddone.com/finance/mirr.html Parrino, R, & D. Kidwell. (2009). Fundamentals of Corporate Finance. (Vol. 1, Ed.). Wiley Custom Solutions. Smart, S. And WL. Megginson. (2008). Corporate Finance. Thompson Learning. Sullivan, A. And S. Sheffrin. (2003). Economics: Principles in Action. Prentice-Hall. The IRR is the rate of return that makes the
For company B, the risks associated with cash flows are higher than that for company A, and are in the order of 11%, but nevertheless, the IRR on the cash flows is higher than the minimum required rate of return of 11% making this investment also attractive. As these two projects are mutually exclusive, and considering only IRR investment selection criteria, purchase of company B. with IRR of 14,305%
Capital Budgeting If the discount rate is 0%, the project's NPV is $670,000. If the discount rate is 2%, the project's NPV is $614,353.50. If the discount rate is 6%, the project's NPV is $514,815.60. If the discount rate is 11%, the project's NPV is $408,997.50. The project's modified internal rate of return is 39%. The chart will show that the net present value is zero will at 46%, as this
Any discount rate lower will yield a positive net present value, up to $126,000. Part II. For capital budgeting decisions, NPV is a better metric. NPV and IRR are very similar in many respects, and they carry the same reliance on the same underlying assumptions about the underlying cash flows. Additionally, they both relate to the company's cost of capital. IRR is typically used as a go/no-go threshold, whereas NPV measures
It would be difficult for the company to satisfy its shareholders with differing interests, but there is a solution-Net Present Value. Using Net Present Value (NPV) as criteria to select projects assumes proficient capital markets. In other words, in order to work the company has to have access to whatever budget is needed to continue the positive Net Present Value projects. Sometimes there may also be capital ration and the
The NPV method is when the company will discount all possible income received from an investment, to where it is in line with their projected minimum rate of return (hurdle rate). At which point, managers will be able to see if the present value will have a positive or negative return for the organization in the future. Those projects that can provide positive present values will more than likely