In: Finance
You are 30 years old today and are considering studying for an MBA. You have just received your annual salary of $50,000 which you expect will grow by 3% per year. MBA’s typically earn $80,000 upon graduation with salaries growing by 4% per year. The MBA program you’re considering is a full-time, 2-year program that costs $30,000 per year, payable at the end of each study year. You want to retire on your 65th birthday. The relevant discount rate is 8%. Is it worthwhile for you to quit your job in order to earn an MBA? (Ignoring taxes.)
Use Excel formulas.
Real interest rate after considering growth option:
Continue job = (1+8%)/(1+3%) -1 = 4.84544%
MBA = (1+8%)/(1+4%) - 1 = 2.8571%
Particulars | Continue | Graduate |
Salary | 50,000.00 | 80,000.00 |
× PFAF Continue: 35yrs, Graduate: 33yrs |
16.67953 | 21.18563 |
Present value of salary | 833,976.27 | 1,694,850.66 |
× PV factor for 2 years | 0.85734 | |
Present value of salary today | 833,976.27 | 1,453,061.26 |
Less: present value of tuition | - | ($53,497.94) |
Net present value | 833,976.27 | 1,399,563.32 |
Get MBA as present value is higher.