Question

You are 30 years old today and are considering studying for an MBA. You just received your annual salary of $50,000 and expect it to grow by 3% per year. MBA typically earns $80,000 upon graduation, with salaries growing by 4% per year. The MBA program you are considering is a full-time, 2-year day program that costs $30,000 per year, payable at the end of each study year. You want to retire on your 65th birthday. The relevant discount rate is 8%\.\* Is it worthwhile for you to quit your job in order to do an MBA (ignore income taxes)? * Meaning: Your MBA is an investment like any other investment. On other investments, you can earn 8% per year, the MBA has to be judged against this standard.

Answer 1

Answer:

Yes, you should take the MBA because the NPV of taking the MBA is positive.

Explanation:

the total economic costs of taking the MBA program include the lost wages + the costs of taking the MBA and any interest you could have earned by investing it on something else = ($50,000 x 1.03) + ($50,000 x 1.03²) + (2 x $30,000 x 1.08) = $51,500 + $53,045 + $64,800 = $169,345

the present value of your total economic costs:

$51,500/1.08 + $53,045/1.08² + $32,400/1.08 + $32,400/1.08² = $47,685.19 + $45,477.54 + $30,000 + $27,777.78 = $150,940.51

if you continued to work, your salary at year 3 would be $54,636.35 and it would continue to increase by 3% every year. The salary that you can earn with an MBA is $80,000 and it will grow by 4% per year. I used an excel spreadsheet to calculate future salaries and the differential amount between them. Then I calculated the PV at the beginning of year 3 of the differential income.

The PV of the differential income today = $560,281.31 /1.08³ = $444,769.38

the NPV of taking an MBA = $444,769.38 - $150,940.51 = $293,828.87