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Problem 3.  You currently make $100,000 a year and expect your salary increase by 10% a year...

Problem 3.  You currently make $100,000 a year and expect your salary increase by 10% a year for 20 years.   You are considering an MBA which will cost you $120,000 for the entire education. If you take the MBA, you will have to pay the full tuition today (all upfront) and you will make zero earnings at the end of years 1 and 2.  However, after graduation you’ll have an opportunity to join a premier investment bank, which promises $130,000 a year, which will grow by 15% for 18 years after graduation.  Is the MBA a good deal? Assume a constant discount rate of 15%.  What if rates fall to 10%?  What if rates rise to 17%, how does your answer change?  Show your detailed spreadsheet calculations (Alt#2). Note: salary is paid at the end of each year.

Solutions

Expert Solution

In case of with out MBA
Year Salary PVF@15% PV
1 110000.000 0.870 95652.174
2 121000.000 0.756 91493.384
3 133100.000 0.658 87515.411
4 146410.000 0.572 83710.393
5 161051.000 0.497 80070.810
6 177156.100 0.432 76589.471
7 194871.710 0.376 73259.494
8 214358.881 0.327 70074.298
9 235794.769 0.284 67027.590
10 259374.246 0.247 64113.347
11 285311.671 0.215 61325.810
12 313842.838 0.187 58659.470
13 345227.121 0.163 56109.059
14 379749.834 0.141 53669.534
15 417724.817 0.123 51336.076
16 459497.299 0.107 49104.073
17 505447.028 0.093 46969.113
18 555991.731 0.081 44926.978
19 611590.904 0.070 42973.631
20 672749.995 0.061 41105.212
Total PV of Cash inflows 1295685.328
Now in case if I do MBA
Year Cost of MBA Salary PVF@15% PV
0 -120000.000 1 -120000.000
1 0.000 0.870 0.000
2 0.000 0.756 0.000
3 130000.000 0.658 85477.110
4 149500.000 0.572 85477.110
5 171925.000 0.497 85477.110
6 197713.750 0.432 85477.110
7 227370.813 0.376 85477.110
8 261476.434 0.327 85477.110
9 300697.900 0.284 85477.110
10 345802.584 0.247 85477.110
11 397672.972 0.215 85477.110
12 457323.918 0.187 85477.110
13 525922.506 0.163 85477.110
14 604810.881 0.141 85477.110
15 695532.514 0.123 85477.110
16 799862.391 0.107 85477.110
17 919841.749 0.093 85477.110
18 1057818.012 0.081 85477.110
19 1216490.714 0.070 85477.110
20 1398964.321 0.061 85477.110
Total PV of amount after deducting MBA fees 1418587.984
here the amount after doing MBA is higher so it is a good deal
Case (B) If the rates falls to 10%
In case of with out MBA
Year Salary PVF@10% PV
1 110000.000 0.909 100000.000
2 121000.000 0.826 100000.000
3 133100.000 0.751 100000.000
4 146410.000 0.683 100000.000
5 161051.000 0.621 100000.000
6 177156.100 0.564 100000.000
7 194871.710 0.513 100000.000
8 214358.881 0.467 100000.000
9 235794.769 0.424 100000.000
10 259374.246 0.386 100000.000
11 285311.671 0.350 100000.000
12 313842.838 0.319 100000.000
13 345227.121 0.290 100000.000
14 379749.834 0.263 100000.000
15 417724.817 0.239 100000.000
16 459497.299 0.218 100000.000
17 505447.028 0.198 100000.000
18 555991.731 0.180 100000.000
19 611590.904 0.164 100000.000
20 672749.995 0.149 100000.000
Total PV of Cash inflows 2000000.000
Now in case if I do MBA
Year Cost of MBA Salary PVF@10% PV
0 -120000.000 1 -120000.000
1 0.000 0.909 0.000
2 0.000 0.826 0.000
3 130000.000 0.751 97670.924
4 149500.000 0.683 102110.512
5 171925.000 0.621 106751.898
6 197713.750 0.564 111604.257
7 227370.813 0.513 116677.178
8 261476.434 0.467 121980.686
9 300697.900 0.424 127525.263
10 345802.584 0.386 133321.866
11 397672.972 0.350 139381.951
12 457323.918 0.319 145717.494
13 525922.506 0.290 152341.016
14 604810.881 0.263 159265.608
15 695532.514 0.239 166504.954
16 799862.391 0.218 174073.361
17 919841.749 0.198 181985.786
18 1057818.012 0.180 190257.868
19 1216490.714 0.164 198905.952
20 1398964.321 0.149 207947.132
Total PV of amount after deducting MBA fees 2514023.707
here the amount also greater so doing MBA is better
Case (c) If the rates rises to 17%
In case of with out MBA
Year Salary PVF@17% PV
1 110000.000 0.855 94017.094
2 121000.000 0.731 88392.140
3 133100.000 0.624 83103.721
4 146410.000 0.534 78131.704
5 161051.000 0.456 73457.157
6 177156.100 0.390 69062.285
7 194871.710 0.333 64930.353
8 214358.881 0.285 61045.631
9 235794.769 0.243 57393.328
10 259374.246 0.208 53959.539
11 285311.671 0.178 50731.191
12 313842.838 0.152 47695.991
13 345227.121 0.130 44842.385
14 379749.834 0.111 42159.507
15 417724.817 0.095 39637.144
16 459497.299 0.081 37265.691
17 505447.028 0.069 35036.119
18 555991.731 0.059 32939.941
19 611590.904 0.051 30969.176
20 672749.995 0.043 29116.319
Total PV of Cash inflows 1113886.416
Now in case if I do MBA
Year Cost of MBA Salary PVF@17% PV
0 -120000.000 1 -120000.000
1 0.000 0.855 0.000
2 0.000 0.731 0.000
3 130000.000 0.624 81168.172
4 149500.000 0.534 79780.682
5 171925.000 0.456 78416.910
6 197713.750 0.390 77076.450
7 227370.813 0.333 75758.904
8 261476.434 0.285 74463.880
9 300697.900 0.243 73190.993
10 345802.584 0.208 71939.865
11 397672.972 0.178 70710.124
12 457323.918 0.152 69501.403
13 525922.506 0.130 68313.345
14 604810.881 0.111 67145.596
15 695532.514 0.095 65997.808
16 799862.391 0.081 64869.640
17 919841.749 0.069 63760.757
18 1057818.012 0.059 62670.830
19 1216490.714 0.051 61599.534
20 1398964.321 0.043 60546.550
Total PV of amount after deducting MBA fees 1146911.443
here the amount also greater so doing MBA is better

Feel free to ask any query if arises i m ready to help you as your satisfaction is very valuable

jeff jeffy answered 2 years ago
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