Your supervisor has a client named Natasha Kingery. Natasha 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 $75,000 a year, which 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 also has $100,000 that she recently inherited from her aunt. She plans to invest this money in a 5-year certificate of deposit (CD) account at her local bank. She is also considering whether to further her education and use her inheritance to pay for it. If Natasha does not what to use her inheritance to pay for her tuition up front, she could borrow the money. Your supervisor has investigated a couple of options for Natasha and is asking for your help determining the financial consequences of each option. (Natasha has already been accepted to the two programs below and could start either one soon.) One alternative for Natasha 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 $50,000 per year, due at the beginning of her three school years. 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 Natasha can earn on her inheritance by going to the website of her back (https://www.seattlebank.com/) and determining the rate offered on a 5-year certificate of deposit (CD). Use this interest rate as the discount rate for the remainder of your analysis. 2. Try to make 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 certification. In other words, 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 salary differential’s present value (PV) for completing the certification program. Subtract the program’s cost to calculate the net present value (NPV) of undertaking the certification program. 4. Calculate the PV of the salary differential for completing the MBA degree. Calculate the PV 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 Natasha? What if the two programs are mutually exclusive? That is, if Natasha undertakes one of the programs, there is no further benefit to undertaking the other program. Would your advice be different?
Natasha Kingery, a 30-year-old professional with a Bachelor of Science degree in computer science, is at a crossroads in her career. She currently works as a Tier 2 field service representative for a telephony corporation in Seattle, earning a salary of $75,000 per year, with an expected annual salary growth of 3%. Her retirement goal is set at age 65, and she has recently inherited $100,000, which she is considering investing in a 5-year Certificate of Deposit (CD) account.
Furthermore, Natasha has two promising career advancement options in front of her:
This certification would promote Natasha to a Tier 3 field service representative role in her company, which comes with a $10,000 increase in annual salary. The certification program takes one year to complete, requires a $5,000 upfront cost, and has no associated loss of income during the certification period.
Completing an MBA degree would potentially lead to a managerial position in her current firm, with a $20,000 annual salary increase. The evening program spans three years, costs $50,000 per year (due at the beginning of each school year), and does not result in income loss during her study.
Let’s analyze these options:
To calculate the present value (PV) of future cash flows, we need to establish a discount rate. Natasha can find this rate by visiting her local bank’s website (https://www.seattlebank.com/) and checking the rate for a 5-year CD. For the sake of this analysis, let’s assume the bank offers a 4% interest rate on a 5-year CD. This rate will serve as our discount rate.
To calculate the present value of future cash flows, we’ll construct a timeline in Excel. We will consider that salaries are paid once a year, and salary increases take effect immediately upon graduation or certification.
The present value of the salary differential for completing the certification program can be calculated by discounting the future salary increases. Subtracting the program’s cost from the present value of these salary increases will give us the Net Present Value (NPV) of undertaking the certification program.
Similar to the certification program, we’ll calculate the present value of the salary differential for the MBA program and also find the present value of the cost of the program. By subtracting the program cost from the present value of salary increases, we can determine the NPV of pursuing an MBA.
After calculating the NPVs for both options, we can compare the financial outcomes:
For the Certification Program: If the NPV is positive, it’s a financially beneficial decision.
For the MBA Program: If the NPV is positive, it’s also a financially beneficial decision.
The decision depends on Natasha’s financial goals and preferences. If both programs are financially advantageous, she should consider her long-term career goals and personal interests.
However, it’s essential to consider that these programs might not be mutually exclusive. If Natasha chooses one, there may still be benefits to pursuing the other program, depending on her career aspirations. Therefore, Natasha should evaluate her professional ambitions, including the skills she wants to acquire and the roles she envisions in her career.
In conclusion, Natasha’s decision should not be solely based on the financial aspect. She should align her choice with her career objectives and personal aspirations, while also taking into account the potential financial gains. Natasha’s situation is unique, and the decision should reflect her individual goals and priorities.
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