Question

In: Finance

You are 30 years old today and are considering studying for an MBA. You have just...

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.

Solutions

Expert Solution

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.


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