Reference no: EM1314227

Explain the term Capital Budgeting decisions

Assume today is August 1, 2006. Natasha Kingery is 30 years old and has a Bachelor of Sci-ence degree in computer science. She is currently employed as a Tier 2 field service rep-resentative for a telephony corporation located in Seattle, Washington, and earns $38,000 a year that 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 has $75,000 that she recently inherited from her aunt. She invested this money in 10-year Treasury Bonds. She is considering whether she should further her education and would use her inheritance to pay for it.?

She has investigated a couple of options and is asking for your help as a financial planning intern to determine the financial consequences associated with each option. Natasha has already been accepted to both of these programs, and could start either one soon.
One alternative that Natasha is considering 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 cur¬rently 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 V/eb-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 close of the program is $5,000, due when she enrols in the program. Because she will do all the work for the certification on her own time, Natasha does not expect no 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.

If Natasha lacked the cash to pay for her tuition up from, she could borrow the money. More intriguingly, she could sell a fraction of her future earnings, an idea that has received atcemton from researcher, and entrepreneurs; see Miguel Palados, Investing m Human Capital: A Capital Markets Approach to 5tu-dent Funding, Cambridge University Press, 2004.

Natasha 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 rake three years to complete, costs $25,000 per year, due at the beginning of each of her three years in school. 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 she is currently earning on her inheritance by going to Yahoo! Finance and clicking on the 10-year bond link in the marker summary. Then go to Historical Price and enter the appropriate date, August 1, 2006 to obtain the closing yield or interest rate that she is earning. Use this interest rate as the discount rate for the remainder of this problem.

2. Create 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 being certified. That is, because die increases become effective immediately hut salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification.