Question

Getting an MBA is an investment in yourself, and it should be viewed through the same lens as any other investment decision. So let's see if MBA is a good decision with a simplified example? We have to look at the two following options.

1. You go to business school, forego two years of salary, borrow around $50,000 per year (both tuition and cost of living) and then go on to make more money (this is the whole point) than you would on your current career trajectory.
2. You do not go to business school and continue to make your current salary and get raises and promotions at a normal rate. These are not easy assumptions to make but linear growth usually works best.
3. Your current salary is 50,000 and grows at 3% every year.
4. Your salary after MBA will be 90,000 and will grow by the same percentage, i.e. 3%.
5. Your cost of capital, i.e. interest rate at which you can finance your MBA is 7%
6. Assume you're doing your MBA at the age of 40, and have 20 years of working life after MBA (or 22 including MBA)
7. For simplicity, assume your first cash flow, i.e. the first tuition payment is next year, i.e. you don't have any explicit cash flows (tuition or salary) in the present (Year 0).

Calculate the NPV of MBA using the information above. Ignore opportunity costs, just use explicitly stated costs (tuition) and benefits (salary). Use Excel, and upload the Excel file using the dialog box at the bottom of the exam.

Select one:

a. $327,623.38

b. $204,594.64

c. $1,227,888.92

d. $957,594.29

Please show formulas used

Answer 1