Mr, Corporate Finance

PROBLEM 1

A friend of yours, employed as a Tier 2 field service representative for a telephony corporation, wants your help as a financial specialist to determine the financial consequences associated with investing in education. One alternative is to enroll in an MBA-program and the other alternative is to attain a certification in network design. Your friend has provided you the following information:
General
• The current salary of $40 000 is paid once at the end of each year.
• The salary is expected to grow at a rate of 3% per year and your friend is expected to work for another 35 years (until retirement)
• Your friend’s income tax level is expected to be 25% forever
• Your friend’s current discount rate is 10% and is expected to stay at this level forever unless no further education investment is made.
• Today is the 1st of January 2013
The network design certification education
• The education starts immediately and ends 31st of December 2013
• The course fee is $5 000, to be paid today.
• The certificate implies a promotion and a salary increase of $10 000. The new salary will be paid starting December 31st 2014 and onwards.
• Due to that the education runs on evenings no salary loss is expected during the education
• Upon completion of the education your friend’s new discount rate will become 11%
The mba-program education
• The education starts immediately and ends the 31st of December 2013
• If enrolling your friend will earn no salary during 2013
• The tuition fee is $20 000, to be paid today
• An MBA degree implies a managerial position in the company and a salary increase of $20 000 . The new salary will be paid starting December 31st 2014 and onwards.
• Upon completion of the MBA-program your friend’s new discount rate will be 13% (following higher risk of income decrease)

Your task
Your task is to create a spreadsheet model (using Microsoft Excel) showing your friend which alternative is to prefer from a financial point of view. In particular your friend wants you to show her the following in the spreadsheet model:
a) Show by calculation the net present value for the three alternatives (no education, network design certification, mba). Also, according to NPV suggest which alternative you advise your friend to choose
b) Show by calculation (creating a formula) the discount rate (by replacing the 13% given above) at which your friend ought to be indifferent between not investing in education and investing in the MBA education (assuming she will complete it successfully).
c) Your friend is a bit uncertain about what her discount rate will be if completing an MBA. Therefore she wants you to show in a graph the NPV (with and without income tax) for different discount rates. Use the interval 0% to 100% with 5% subintervals. Set the y-axis as NPV and use the x-axis for the discount rates.
Finally, since your friend wants to be able to use this spreadsheet in the future as well you need to use cell references in the formulas (for tasks a, b and c above).
Posted Date: 12/29/2012 2:43:12 PM | Location : Sweden







Related Discussions:- Mr, Assignment Help, Ask Question on Mr, Get Answer, Expert's Help, Mr Discussions

Write discussion on Mr
Your posts are moderated
Related Questions
#queM&A E-III Corp. is investigating the possible acquisition of Silicon Inc. Assume that both firms have no debt outstanding. E-III Corp. Silicon Inc. Pre-announcement stock price

Assignment Describe in detail one method for improving the accuracy of option prices and the first two 'Greeks', Delta and Gamma, calculated using the binomial tree. You should giv

Question: In view of its international operations management, Remo Ltd which is based in USA expects to make a payment of £ 50,000 to a UK supplier for raw materials in six mon


X has 10 shareholders, each of whom owns 100 of its 1,000 outstanding shares of common stock (worth $100 per share).  No other stock is outstanding.  Determine whether the securiti

differentiate between pricing efficiency and allocative efficiency

The Chocolate ice cream company and the vanilla ice cream company have agreed to merge and form Fudge Swirl Consolidated.Both companies are exactly alike that are located in differ

Question: (a) i. Expected loss= Exposure amount* probability of default* loss given default ii. Positive covenants= covenants that showing the direction to a company. P

#quThree years ago the U. S. dollar equivalent of a foreign currency was $ 1.2167. Today, the U. S. dollar equivalent of a foreign currency is $ 1.3310. Determine the percentage ch

#quOn Completion of her introductory finance course, Kieran was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were w