Question

Ellen Nicholas has been accepted into the MBA program at UWO and is deciding whether or not to enroll in the program beginning in February of 20X3 (but let’s just pretend there’s a full year involved). She would continue to work at her current job and take classes part-time in the evenings, finishing in December of 20X6. She estimates that her incremental cash outflows, including tuition, fees, books, software, travel, and so on, will be $7,500 per year in the program. She is currently earning interest on her liquid assets at the rate of 2.0%.

Ellen believes that her current employer would not value the MBA degree highly (she cannot receive tuition reimbursement, for example). If she stays with her current employer after she earns her degree, she expects the present value of all of her future compensation from her current employer would increase by only $10,000 more than it would without an MBA.

Ellen expects to search for a new job during her last semester. If she finds a new job that she wants to take, she will start the new job in January of 20X7. Her research at the University’s career resources center indicates that starting salaries for new MBA graduates in the geographic locations she is willing to consider have changed over the past decade with an annual volatility of 35%. Starting in 20X7, Ellen expects changes to government policy and the global economy will increase interest rates to 5.0%.

If she decides to take a new job, Ellen will give her current employer enough notice so that she can relocate at the very end of December after graduation. She estimates that relocation costs, net of moving expenses covered by her new employer, will be $35,000. She does not expect interest rates to change much between today and December of 20X7.

A. What asset is Ellen purchasing when she enrolls in the MBA Program?

B. What is the minimum value Ellen must place on the asset as of February 20X3 (remember we are pretending all of 20X3 is involved)?

C. What is the minimum estimate that Ellen must have for the present value of her increased future compensation (relative to her current compensation) from her new employer that would make enrolling in the MBA program a rational decision?

Answer 1

A) Ellen is doing an Educational course, so we can not compare it directly to an asset. Since we have to treat it as an asset we have to do many things before making a conclusion. Since the value for education can't be felt physically we can treat it as an intangible asset with unlimited life, because we know that the value of knowledge will not reduce over a period of time.

B) Minimum Value to be placed can be calculated by taking the sum off the additional income & expenses which Ellan is getting over the next few years.

Expense = $7500

Income = $10000

Net Income will be $2500, but the life of the asset is infinity so that valuing an asset only based on the income may not be always correct.

3) Ellen is expected to have an increase of $10000 as income for the next few years based on the additional Qualification which she is will complete in next 2 yrs time.