Time Value of Money

Introduction

The time value of money is the value of money figuring in a given amount of interest earned or inflation accrued over a given amount of time. The time value of money is important when making financial decisions as well as taking into consideration the aspects associated with the time value of money (Berk & DeMarzo, 2011). Present value and future value are calculations that will adapt values and help make a sound decision. David Jetter had to take all of his options for a NBA program into consideration when deciding if he should leave his job to pursue an advance career.

Analysis

David has a situation that is limited by his age. He is currently 28 years old and plans on retiring at age 40 making his years of work limited to 12 years. If David makes the decision to go back to college to complete an MBA program then his years of employment will be decreased to 11 or 10 years depending on what MBA option he chooses. These decreased years would affect his total incurred funds from the prospective companies after the MBA program.

There are many other non-quantifiable factors that were not depicted in the description of MBA programs. Although the two colleges offer employment after graduation there is still uncertainty within the economy as to if the companies will keep the promise of employment especially for the two year program at Prentice University.

David also has been out of college for 6 years and might base his decision on whether or not he feels that he could get back into the college atmosphere as well as quieting his steady pay check. If David does decide to go back he has the choice of a one year or two year program that both yield different financial values. The length of time could also be a determining factor.

From a strictly financial standpoint the option for the 1 year program would be the best choice for David. When computing the calculations the first step is to convert all the MBA choices tuition, supply expenses and room and board into a future value based on the discount rate and the point at which the payment is due (beginning of the period or end of the period) (Investopedia). The next step is to take all three options and calculate the total income; taking into consideration the income increases and the tax bracket percentages. The MBA fees are then subtracted from the possible income yields to determine which option is the best choice financially.

All options yielded six figure salaries and within a $100,000.00 range of each other. The option to stay at his current employment was the lowest yielding with the MBA choice of a two year program coming in second as the worst yielding. Although, the two year program promised more income upon graduation the tuition fees where the most expensive. The one year program offered more income that David's current job but less than the two year program;