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Perform a Net Present Value (NPV) analysis for two educational options that a student is considering for pursuing a two-year master’s degree. For each option, calculate the NPV using an 8% discount rate, describe what NPV is and its purpose, and then recommend the best option based on your analysis, including any necessary assumptions. The paper should be 1-2 pages, APA formatted, and include at least one reference.

Paper For Above instruction

The concept of net present value (NPV) is a financial metric used to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows over a period of time. NPV is fundamental in capital budgeting because it helps investors or decision-makers determine whether an investment will generate a net gain or loss when accounting for the time value of money. It is calculated by discounting future cash flows to their present value using a specified discount rate, and then subtracting the initial investment. If the NPV is positive, it indicates that the project is expected to generate value beyond the cost of capital, and thus, it may be considered a desirable investment.

For the scenario involving the student pursuing a master's degree, two options are considered: full-time and part-time education. Both options involve an initial investment of $100,000, but differ in how they affect the student’s earnings and work during the study period.

In the full-time education option, the student forfeits current earnings of $30,000 annually to study full-time, assuming no income during the two-year period. Upon graduation, the student hopes to attain a $60,000 annual salary. Conversely, the part-time option involves working part-time for three years at a reduced salary of $20,000 while studying, with a total investment of $100,000. After graduation, the student expects a salary increase to $40,000, representing an enhancement in earning capability.

To determine the more financially advantageous option, the NPV for each scenario is calculated using an 8% discount rate. In the full-time option, cash flows include the opportunity cost of forgone earnings over two years and the increased earnings after graduation. For the part-time option, cash flows comprise the reduced income during study and increased income afterward, against the initial investment. The NPV calculations consider these cash flows discounted to present value.

Calculating the NPV for the full-time option, the opportunity cost of lost earnings over two years amounts to $60,000, assuming no income during this period. The post-graduation cash inflow is an increase from $30,000 to $60,000 annually. Applying the discount rate, the present value of these cash flows suggests that pursuing full-time education might yield a positive NPV, provided the future salary increase compensates for the initial loss.

For the part-time education, the cash flows during three years include earning $20,000 annually instead of $30,000, resulting in an annual opportunity cost of $10,000. After graduation, the salary moves from $30,000 to $40,000. Discounting these cash flows at 8%, the NPV reflects the net benefit of the investment in education when considering the ongoing lower income during study and subsequent salary increase.

Based on the calculations, assuming consistent cash flows and no additional costs, the option with the higher NPV should be preferred. Typically, if the NPV of the full-time option is higher than that of the part-time, the student should choose to study full-time, as it offers a greater expected return on investment. Conversely, if the part-time option’s NPV is higher, maintaining income while studying would be more financially advantageous.

In conclusion, the decision depends on the precise NPV calculations, which incorporate future earnings, opportunity costs, and the discount rate. Usually, the full-time option is more favorable if the anticipated salary increase significantly outweighs the cost of lost income during study. However, personal considerations, risk tolerance, and career goals should also influence the final decision.

References

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