Question

John is 29 years old (just had his 29th birthday party) and is thinking about getting an MBA degree. He is currently making $60000 per year and expects the same for the remainder of his working years. John is planning to retire when he turns 65. If he decides to go to a business school, it will take him two years to get the degree. During these two years, he gives up his income and, in addition, pays $65000 in tuition each year. In return, John expects that his post-graduation salary will increase at 4% per year. Assume that John can enroll into the program immediately, i.e., in Year 0. The first tuition payment is due in Year 1, and the second payment is due in Year 2. If John does not enroll into the program, the he will receive his first salary ($60000) in Year 1. If John enrolls, he will get his first salary one year after he graduates, i.e., in Year 3.

Assume that John's salary has the same risk regardless of whether he obtains an MBA degree and that his expected future salary income should be discounted at 9% per year. Assume that the risk-free discount rate is 4% per year.

(a) What is the present value of Mike's salary income if he chooses not get an MBA degree?

(b) What is the present value of the MBA tuition cost?

(c) What is the minimum expected starting salary after graduation that makes getting MBA degree worth it?

Answer 1

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