Question

After graduating from college, you landed a $75,000 job and were happy with it until your friends started going back to school. Now the MBA is on your mind as well. The cost of a good MBA program is $40,000 a year and such programs require that your are a full-time student. It will take you two years to graduate and you will have to leave your job, while attending school. You expect that the starting salary for an MBA professional will be $120,000 by the time you graduate and will increase by 2 percent every year. If you stay at your current job, your salary will be $77,500 at age 25 and will increase by 1% until you retire. Your opportunity cost of capital is 12%. Is this a good decision, if you start your MBA program when you are 25 and retire when you turn 55 (assume the same retirement age for both options.)

Answer 1

We need to find out the future value of both the options. If you stay at your current job then there is 55 - 25 = 30 years of job and retirement at the age of 55. if you start your MBA program when you are 25 and retire when you turn 55 then there is 55 - 25 - 2 years of MBA = 28 years of job.

We can use financial calculator to find out future value of both options with below key strokes:

Option of staying at current job

N = years = 30; I/Y = rate of increase = 1%; PMT = yearly salary = $77,500; PV = present value = $0 > CPT = compute > FV = future value = $2,695,829.09

Option of doing MBA and starting job after MBA

N = years = 28; I/Y = rate of increase = 2%; PMT = yearly salary = $120,000; PV = present value = $0 > CPT = compute > FV = future value = $4,446,145.24

Now we find out present value of these options at age 25 using opportunity cost of capital of 12%.

Present value of staying at current job = FV/(1+cost of capital)^{no. of years} = $2,695,829.09/(1+0.12)³⁰ = $2,695,829.09/1.12³⁰ = $2,695,829.09/29.9599 = $89,981.24

Present value of doing job after MBA - cost of MBA = $4,446,145.24/1.12²⁸ - $40,000/1.12 - $40,000/1.12² = $4,446,145.24/23.8839 - $40,000/1.12 - $40,000/1.2544 = $186,156.58 - $35,714.29 - $31,887.76 = $118,554.53

So, from above calculations we can see that present value of doing job after MBA of $118,554.53 is higher than present value of staying at job of $89,981.24. So this is a good decision, if you start your MBA program when you are 25 and retire when you turn 55.