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Me1: Assignment 1

In: Business and Management

Submitted By gupas
Words 325
Pages 2
Fall 2014
Take-Home Assignment 1:

Exercise 2

In the following table we calculated the present value (PV) of all three plans at the given discount rate and summed them up to the net present value (NPV).

For part a) the highest NPV of CHF 185’914 results in Plan C (marked in green).
In part b) Plan A provides the highest NPV of CHF 92’828 (marked in orange). Comparing to a), the change in plan can be explained with the changing discount rate from 8% to 30%. Later returns loses weight due to the higher discounting, therefore the attractiveness of a longer education decreases.

Discount Rate | 8% | | | | | Impatience discount rate | 30% | | | | | | | | | | | | Period | | 1 | 2 | 3 | 4 | 5 | Plan A | 30'000 | 40'000 | 40'000 | 45'000 | 45'000 | Plan B | -20'000 | 60'000 | 60'000 | 70'000 | 70'000 | Plan C | -20'000 | -10'000 | 90'000 | 100'000 | 100'000 | | | | | | | | PV @ 8% | | | | | Plan A | 27'778 | 34'294 | 31'753 | 33'076 | 30'626 | Plan B | -18'519 | 51'440 | 47'630 | 51'452 | 47'641 | Plan C | -18'519 | -8'573 | 71'445 | 73'503 | 68'058 | | | | | | | | PV @ 30% | | | | | Plan A | 23'077 | 23'669 | 18'207 | 15'756 | 12'120 | Plan B | -15'385 | 35'503 | 27'310 | 24'509 | 18'853 | Plan C | -15'385 | -5'917 | 40'965 | 35'013 | 26'933 | | | | | | | | | | | | | | a) | b) | | | | | NPV @ 8% | NPV @ 30% | | | | Plan A | 157'527 | 92'828 | | | | Plan B | 179'645 | 90'790 | | | | Plan C | 185'914 | 81'609 | | | |

In c) We assume that Simone chooses Plan B. Why would he do that?

If he discounts the future cash flows between 14% and 26%, Plan B gets the highest net present value. Thus one explanation can be a decrease in his impatience compared to part b). Maybe his health

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