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A student is trying to determine if an MBA makes sense for his career. He is...

A student is trying to determine if an MBA makes sense for his career. He is considering two options for his life.

The first option is to attend a school for his MBA for the next three years. The MBA will cost $41,095.00 per year. After school is over, he will make $79,662.00 per year. He expects his salary to grow at 4.00% a year for 29.00 years after the MBA.

The second option is to stay in his current job. He currently makes $60,601.00 per year. If he does not get an MBA, he expects his salary to grow at 3.00% for the next 32.00 years.

The student can earn 8.00% per year on his investments. For simplicity, let’s assume all cash flows are at the end of the period (including MBA tuition).

What is the present value of the MBA option?

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Answer #1

If MBA is done.

Present Value of Salary =

r = 0.08

n = 29 years

=

= $1324944.11

Present Value of Cost of MBA = Annual Cost * PVAF (3 years, 8%)

=41095 * 2.57709698721

= 105905.80

Net Present Value = $1324944.11 - 105905.80 = 1219038.31

Job continued

Present Value of Salary =

r = 0.08

g = 0.03

n = 32 years

=

= 946106.25

IF MBA is done, the present Value of Salary comes out to be higher comperatively. Therefore, MBA should be pursued.

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