Ms. Taylor is 21 years old and she just obtained her MBA degree. She is considering...

Ms. Taylor is 21 years old and she just obtained her MBA degree. She is considering the following two career options:

(a)Start working now, earning an annual salary of $60,000 in each of next 44 years.

(b)Enroll in a PhD program, in 4 years and subsequent work for 40 years, earning each year the salary of $120,000.

Assume that her educational expenses at the end of each of 4 years will be $30,000. Also, assume that the relevant annual interest rate is 6% throughout, and all the annuities in the question are ordinary annuities. Based on the above information, find the implied or imputed monetary value of her PhD as of now.

Solutions

Expert Solution

a) Present value of opton a, PV = 60000* PVIFA at 6% for 44 years

= 60,000 * 15.3832 = $ 922,992

b) Present value of salery after PhD = 120,000 * PVIFA at 6% for 40 years

= 120,000 * 15.0463 = $ 1,805,556

Present value of salary as on now = 1,805,556 * PVIF at 6% for 4 years

= 1,805,556 * 0.7921 = $ 1,430,180.91

Present value of cost of doing PhD = 30,000 * PVIFA at 6% for 4 years

= 30,000 * 3.4651 = $ 103,953

So, we have now PVs benefit and cost associated with PhD,

Net benefit = $ 1,430,180.91 - $ 103,953

= $ 1,326,227.91

jeff jeffy answered 2 years ago

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