WK 4 Paper Finance - Doc - 35K - Student of Fortune

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Assume today is August 1, 2006. Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science.

She is currently employed as a ier 2 field ser!ice representati!e for a telephony corporation located in Seattle, "ashington, and earns, #3$,000 a year that she anticipates %ill gro% at 3& per year. Natasha hopes to retire at age 6' and has (ust )egun to thin* a)out the future. Natasha has #+',000 that she recently inherited from her aunt. She in!ested this money in 10,year reasury Bonds. She is considering %hether she should further her education and %ould use her inheritance to pay for it. She has in!estigated a couple of options and is as*ing for your help as a financial planning intern to determine the financial conse-uences associated %ith each option. Natasha has already )een accepted to )oth of these programs and could start either one soon. .ne alternati!e that Natasha is considering is attaining a certification in net%or* design. his certification %ould automatically promote her to a ier 3 field ser!ice representati!e in her company. he )ase salary for a ier 3 representati!e is #10,000 more than %hat she currently earns and she anticipates that this salary differential %ill gro% at a rate of 3& a year as long as she *eeps %or*ing. he certification program re-uires the completion of 20 "e),)ased courses and a score of $0& or )etter on an e/am at the end of the course %or*. She has learned that the a!erage amount of time necessary to finish the program is one year. he total cost of the program is #',000, due %hen she enrolls in the program. Because she %ill do all the %or* for the certification on her o%n time, Natasha does not e/pect to lose any income during the certification. Another option is going )ac* to school for an 0BA degree. "ith an 0BA degree, Natasha e/pects to )e promoted to a managerial position in her current firm. he managerial position pays #20,000 a year more than her current position. She e/pects that this salary differential %ill also gro% at a rate of 3& per year for as long as she *eeps %or*ing. he e!ening program, %hich %ill ta*e three years to complete, costs #2',000 per year, due at the )eginning of each of her three years in school. Because she %ill attend classes in the e!ening, Natasha doesn1t e/pect to lose any income %hile she is earning her 0BA if she chooses to underta*e the 0BA. 12 3etermine the interest rate she is currently earning on her inheritance )y going to 4ahoo 5inance 6http788finance.yahoo.com2 and clic*ing on the 10,year )ond lin* in the mar*et summary. hen go to 9:istorical ;rices< and enter the appropriate date, August 1. 2006, to o)tain the closing yield or interest rate that she is earning. =se this interest rate as the discount rate for the remainder of this pro)lem. 22 >reate a timeline in ?/cel for her current situation as %ell as the certification program and 0BA degree options using the follo%ing assumptions7

Salaries for the year are paid only once, at the end of the year he Salary increase )ecomes effecti!e immediately upon graduating from the 0BA program or )eing certified. hat is, )ecause the increases )ecome effecti!e immediately )ut salaries are paid at the end of the year, the first salary increase %ill )e paid e/actly one year after graduation or certification.

32 >alculate the present !alue of the salary differential for completing the certification program. Su)tract the cost of the program to get the N;@ of underta*ing the certification program. A2 >alculate the present !alue of the salary differential for completing the 0BA degree. >alculate the present !alue of the cost of the 0BA program. Based on your calculations, determine the N;@ of underta*ing the 0BA.

4ou are re-uired to compare the ;@ of 3 options a!aila)le to Natasha7 1. 3oing Nothing )y staying in the current (o) 2. Bet a certification 3. Bet a 0BA Option 17 Natasha can decide to remain in her current (o). =nder this option, Natasha %ill start earning #3$,000 and her salary %ill increase )y 3& a year as Natasha intends to %or* for 3' years. o calculate Natasha fortune under this option, you need to calculate the ;@ of her e/pected salaries or cash flo%s. 5irst compute the future salaries. o do so, you need first to find the salaries for the 3' years of %or*. o find the salaries for 3' years using ?/cel, do the follo%ing7 ?nter Current Job in A1 ?nter 3$000 in A2 for year 1 salary ?nter the follo%ing formula in A3 to find the salary for the second year7 CA2D1.03 then press ?nter. 4ou are as*ing ?/cel to multiply the !alue in A2, 3$000, )y 1.03 as Natasha %ill get pay increase of 3& in year 2. o get the rest of the salaries, point your cursor to right corner of A3 %here you ha!e the salary for the second year and %here you )uilt the formula of A2D.103. .nce your cursor turns into a Blac* plus 6E2 sign, hold the cursor and drag it do%n to A36 to copy the formula and you should )e a)le to get the rest of the salaries. .nce you get the salaries for 3' years, then you %ill need to compute the ;@ of the e/pected salaries or future cash flo%s. As the cash flo%s are une!en, use the N;@ function, to compute the ;@. his can )e computed using the follo%ing formula7

CN;@6rate,!alue17@aluen2 he rate to )e used is A.F$&, ?/cel uses decimal rates. hus, CN;@6.0AF$,A27A362 then press ?nter The value you will get is PV of expected salaries or future cash flows. Under Option 1 you can add the !"# $$$ to the PV of future salaries to find %atasha wealth as today.

Option &' (ttaining a Certification7 Gf Natasha recei!es a certification, she %ill earn #10,000 more than %hat she is currently earning, that is #A$,000 and the salary %ill increase 3& a year. But the certification %ill cost #',000 paya)le at the )eginning of the program. he certification program lasts for one year. Hi*e a)o!e, to !alue Natasha fortune, compute the e/pected salaries. o do so, you %ill need to find the salaries of each of the 3' years of %or*. ?nter >ertification in B1 4ear 1 Salary is #3$,000 as Natasha has not completed the program yet and as the program ta*es one year to complete. ?nter 3$000 in B2 4ear 2 salary is #3$,000 / 1.03 C #3F,1A0 E 10,000 differential for completion of certification. hus, year 2 salary C AF,1A0. ?nter AF1A0 in B3 Gn BA for year 3 salary, %rite the follo%ing formula7 CB3D1.03 then press ?nter o get salaries for the rest of the years7 ;oint your cursor to BA %here you ha!e the salary for year 3 and the formula, %hen the cursor turns into plus sign 6E2, hold and drag it do%n through B36 to copy the formula and get the salaries for the rest of the years. .nce you get the salaries for all 3' years, you %ill need to compute the ;@ of the e/pected salaries. As the e/pected salaries are une!en, use the N;@ function to compute the ;@ of une!en cash flo%s. CN;@6Iate,@alue17@aluen2 CN;@6.0AF$,B27B362 then press ?nter .nce you get the ;@ of e/pected salaries deduct the cost of certification, #',000 to get the N;@ of Natasha fortune under the certification option. Under Option & if %atasha used !# $$$ to pay for certification %atasha still have !)# $$$ to be added to the PV of future salaries.

Option *' (ttaining a +,(' =nder this option Natasha %ill earn #20,000 more than her current pay and the salary %ill increase )y 3& a year. But the 0BA program %ill cost #2',000 a year and the program %ill last for 3 years. he pay differential %ill ta*e effect upon completion of the 0BA, thus after 3 years, effecti!ely at the end of year A. o e!aluate the NatashaJs fortune under this option, you %ill also need to compute the ;@ of Natasha e/pected salaries or cash flo%s. 4ou %ill also need to find the ;@ of the cost of the 0BA program as costs are paid at the )eginning of each of the 3 years. hen you %ill need to find the N;@ C ;@ of e/pected salaries K ;@ of cost of 0BA. o find the ;@ of e/pected salaries, you %ill need first to find the salaries for the 3' years. Before the completion of the 0BA program, Natasha %ill still earning her current salaries. ?nter 0BA in >1 hus, 4ear 1 salary C #3$,000 enter this !alue in >2 -n C* enter the following for.ula /C&01.$* then press 1nter / *2 13$ 4or 5ear & salary -n C3 enter the following for.ula /C*01.$* then press 1nter / 3$ *13.& for 5ear * 6alary -n C# for 5ear 3 salary where %atasha will start earning the salary differential will be e7ual to *8 increase fro. 5ear * plus !&$ $$$ +,( differential. *8 increase fro. 5ear * / !31 #&*.)&) 9 &$ $$$ +,( differential / !)1 #&*.)&) for 5ear 3 t be entered in C# -n C) write the following for.ula /C#01.$* to get the salary for 5ear #. To get the salaries for the rest of the years point your cursor to C) and when it turns into ,lac: plus sign hold it and drag it down through C*) to copy the for.ula and get the rest of the salaries. Once you get the salaries for the *# years then you will need to find the PV of these expected salaries using %PV function as the salaries are uneven. /%PV;rate value1'Valuen< /%PV;.$32= C&'C*)< then press 1nter. This is the PV of the expected salaries or future cash flows. (>6O CO+PUT1 T?1 PV O4 CO6T O4 +,(. (s the pay.ents are e7ual but at the beginning of each year you will need to co.pute the PV of annuity @U1. /PV;Aate %per P+T 4V Type< Bhen you enter 1 for Type 1xcel will understand that the pay.ent are done at the beginning of the period. -f 1 is not included 1xcel will co.pute the PV as ordinary annuity and the answer will be wrong.

/PV;.$32= * &#$$$ $ 1< then press 1nter Once you get the PV of the cost of +,( then find the %PV for the +,( Option. %PV / PV of expected salaries C PV of cost of +,(. 1valuate the * options and include a table with the nu.bers of the salaries and PV of each option in your report.

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