Question

Katie is 23 years old and graduated in 2016 from Niagara with a degree in Supply Chain

Management. She works as a planning analyst at Labatt USA, located in Buffalo, NY. She currently earns

a salary of $54,000 per year, and she expects to get salary increases of 3% per year. After your meeting

with Katie last week, she has asked for your assistance with these questions:

Education:

She is considering going back to Niagara to get a Masters of Business Administration

(MBA). The MBA will take two years, and she expects that it will cost at total of $32,000. She would

receive her degree in 2021, when she is 26 years old. She has been told that with a MBA, she would

receive a salary increase of $6,000 per year. If she stays with her present company until she retires at

age 67, what is the total value of the MBA (assume a 5% interest rate and calculate the present value).

Given the MBA cost, and the present value, is this a good financial move?

Also,

Retirement Planning:

She plans on working until she is 67. She feels that in retirement, she would be

comfortable living on 70% of the income she had in the year before she retires. If she gets the MBA, and

lives for 25 years in retirement, with a 5% interest rate, how much would she need to have saved to

retire? How much does she need to save every month to get to that amount?

Answer 1

a.)

Katie's salary present value without MBA, till 67, 44 years of working), with 3% increment and 5% discount rate is

$1,570,318

[Using Pv tables, you can get PVAF for 2% (5-3) for 44 years to get 29.08 multiplied by $54,000, you can get the number above i.e. $1,570,318]

With MBA,

the pv is $1,596,304

[Using the pv tables you can get PVAF for 2% [for years 3-44) 27.1384 multiplied by $60,000, you can get the number $1,596,304]

So, it is better to go for the MBA.

b.)

With MBA, The salary at the end of her career at the age of 67, $207,642,

and 70% of it as $145,349.23

So, she needs a payout of $145,349.23 after her retirement for 25 years,

using this as the equated annual installment, we can find the present value after 44 years, by using pv function, with pmt = $145,349.23, rate = 5%, nper = 25,

which gives $2,048,543.96

So, this is what is needed at the end of her retirement.

So, this is the future value after 42 years, after she start earning.

So, her monthly saving should be, the pmt function with, nper = 12*42 = 504, rate = 5/12 = 0.41667%, fv = $2,048,543.96

which gives $1,197 or approximately $1,200