Question

You are 25 years old and are considering full-time study for an MBA degree. Tuition and other direct costs will be $60,000 per year for two years. In addition, you will have to give up your current job that has a salary of $50,000 per year. Assume tuition is paid and salary received at the end of each year. By how much does your salary have to increase (in real terms) as a result of getting your MBA degree to justify the investment? Assume a real interest rate of 2% per year, ignore taxes, assume that the salaries for both jobs increase at the rate of inflation (i.e. they stay constant in real terms), and that you retire at 65. Note: the $1 for T periods annuity formula is (1/r)*[1-1/(1+r)^T]. g

Answer 1

Answer:

$8,403.73

Explanation:

The job will be started at the age of 27 ( 25 years + 2 years ) and retirement will be at the age of 65.

Hence the employment years are 38 years ( 65- 27 ).

Cost of MBA program = Direct cost + Opportunity cost =  $60,000 + $50,000 = $110,000

At the age of 27, the total cost of the program will be

Total Cost of MBA program = Cost of program in first year + Cost of program in last year = $110,000 +  ( $110,000 x ( 1 + 2% ) ) = $110,000 + $112,200 = $222,200

Use the following formula to calculate teh required salary

Calculate the annuity factor

Annuity factor = (1/r)*[1-1/(1+r)^T] = (1/2%)*[1-1/(1+2%)^38] = 26.440640602064

Now use the following formula to calculate the required salary

Required salary = Total cost of MBA program / Annuity factor for 38 years at 2% = $222,200 / 26.440640602064 = $8,403.73