So I was thinking about a practical problem today, and I decided to calculate the NPV of the DCF for it (in excel). I was hoping someone would check my answers to see if I did it correctly (I figured maybe some others are looking for some practice with this stuff).
Here's the problem:
Suppose I am contemplating getting an MBA, and am trying to figure out how much I'm willing to pay for it. Also assume that the income stream from not getting an MBA is $60K in period 0, and increases at 2.5% annually for the next 40 years (i.e. I work in periods 0-39). Assume the income stream from getting the MBA is $75K in period 0, and increases 3.5% annually for the next 40 years (again, note that I work in periods 0-39). Assume that my discount rate is 10%. (I'm not claiming these figures are accurate, in fact, I picked values that I believed would give me a conservative estimate.) How much am I willing to pay for the MBA (i.e. what's the difference between the NPV under the two different income streams)?
Answers for comparison:
NPV of not getting MBA = 827,792.86
NPV of getting MBA = 1,158,199.02
Difference (i.e. willingness to pay for MBA) = 330,406.16
P.S. I was assuming that these were real (as opposed to nominal) values. In other words, the annual increases in salary growth are measured in real income (not nominal income). Put differently, all salaries/incomes are measured in present dollars (i.e. dollars in period 0).
did you account for the opportunity cost of not earning income for the two years while in MBA?
feenans, you are dumb, the assumption is that you are out of an MBA so the starting point between no MBA at all and having an MBA is at time 0.
thats a dumb assumption because you have to consider the payoffs in the first two years as positive for no-MBA and negative for MBA
did you account for the fact that you are an incredible dolt, loser, and jackass when you were formulating the assumptions for your Life-DCF model?
you may want to contact a pseudo investment bank for some personality restructuring advisory, maybe that'll decrease your required rate of return enough to make your life yield a positive NPV
where's the LBO model to show some juiced up returns after paying off that B-school debt and finally owning full equity in yourself??? why haven't you provided us with any comps tables?
Don't you fucking know that you have to use at least three different models and triangulate the results??? HUH??? HUH????
too funny
This is ridiculous.
Affirmative_Action, thanks for making me laugh!
From an economic perspective, the discount rate is not a measure of what you could earn on other investments (although that is often used, because you can assume someone only cares about money), in reality the discount rate is a measure of impatience. I used 10% to be extremely conservative. Not to mention, this DCF was less about being accurate, and more about practice. I understand what you guys are saying, if I wanted to make it more accurate, I should change some things (like the discount rate, since I'm not that impatient), and maybe even the salaries. The way I would change the salaries if I was trying to be completely accurate, is to include the opportunity cost in the first two years. However, this effect is offset somewhat (I think) by the fact that I've assumed you have to pay a lump sum for the MBA upfront. In reality, you finance an MBA, and therefore just lose out on some salary every year for 20 years. Also, the willingness to pay is $330K, so you could subtract the opportunity cost from that to give yourself an estimate of what the value would be if you included the opportunity cost.
Again, "we talking 'bout practice," so I wasn't trying to be completely accurate (I just wanted to practice using excel to do some simple NPV stuff). I was hoping someone could see if I did the calculations right.
i think trying to do these kind of projections is useless because there is no way you can predict your future income with any significant accuracy. of course you can look at average numbers but they are off no use to any given individual, especially in finance. nevertheless, if you are looking for practice in excel you HAVE to incorporate all of those in your calculations. as of now your case is ridiculously simple, you dont need excel to do that i can calculate it by hand with two growing annuities. it is these other things like opportunity cost, loan interests, etc, that you need to practice doing. why would you need to practice dividing 40 numbers by (1+r)^t ??a fifth grader could do that
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