Question

You are 30 years old and are considering full-time study for an MBA degree. Tuition and

other direct costs will be $20,000 per year for two years. In addition, you will have to give
up a job with a salary of $40,000 per year. However, if you go on for two more years of

graduate study, you can increase your earnings to $45,000 per year. Assume a real
interest rate of 4% per year and ignore taxes. Also assume that the salary increase is
constant real amount that starts after you complete your degree at the end of the year
question
following graduation and lasts until retirement at age 70. Assume tuition is paid and
salary received at the end of the year. Is this a worthwhile investment?
Select one:
0 a. NPV of MBA is $96,839.32. Hence, MBA is a worthwhile investment
0 b. NPV of MBA is -$96,839.32. Hence, MBA is NOT a worthwhile investment
0 C. NPV of MBA is $23,632.29. Hence, MBA is a worthwhile investment
0 d. NPV of MBA is -$23,632.29. Hence, MBA is NOT a worthwhile investment

Answer 1

We can calculate the NPV of doing MBA in the excel sheet as follows

MBA fee = $ 20,000 per year

Salary Foregone = $ 40,000 per year

Total Cash Outflows at the end of first and Second year are

= MBA fees + Salary foregone

= 20,000 + 40,000

= $ 60,000

After the study the total cashflows inflows till the age of 70 years are

= Increased salary - Salary foregone

= 45,000 - 40,000

= $ 5,000

Rate of return is 4%

As he is 30 years old now and to reach 70 years it will take 40 more years.

So, the NPV of doing comes out to be $ -23,632.30 aprox to $ -23,632.29 which suggests us that doing MBA is not worthwhile investment.

Therefore the correct answer is option (d).

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