Question

It’s 2014. You’ve been working for 4 years. You’re thinking about getting an MBA (full time two years).
• Current Salary: $80,000 per year
• Expected Salary: $110,000 per year
• Cost of an MBA: $100,000
How many years to take to pay back the cost after the graduation? Assume 8% of annual rate.

Answer 1

We'll find the answer using the discounted cash flow method. Let's assume the cost of MBA is payable as $50,000 every year. Also, let the salary is paid at the end of the year.

1. Write the cash flows for the project.

2. Compute discount factor for each year. This done by the formula 1/(1+r)ⁿ where r is the rate of interest and n is the year.

3. Calculate the Discounted cash flow by finding the product of each cash flow and its corresponding discount factor.

4. Add all the discounted cash flows to calculate Cumulative cash flows.

The project covers the cost at the end of year 3 (beginning of year 4).

All the values (at the beginning of each year) are shown in the table below: