Question

Great news from your California-based brother, age 25, who has just landed a new job offer as digital marketing manager of Groove Inc., one of the best employer on the West Coast. If he were to accept this new job, he expects to earn an annual real income stream of $85,000 until retirement at age 60. Delighted by the great piece of news, he's nevertheless left pondering about how to respond to an acceptance letter he had previously bagged from a leading East Coast Business School to complete a two-year MBA programme. If he decides to accept the MBA offer, he would forgo two years of income in the new position at Groove Inc., but his real income after graduation would be $150,000 per year until retirement. The cost of the MBA programme is a real $50,000 per year (paid at the beginning of each year). QUESTION 1: If the discount rate is 10%, would you advise him to turn his new job offer down and get an MBA instead? QUESTION 2: Having heard about the MBA offer, the digital marketing director of Groove decides to increase his offer to $120,000 per year to lure your brother to the new job. Would you change your advice to your brother in light of the increased offer? What else can you learn from this, such as opportunity cost? Give examples for real income or nominal income, as it is not described which one it is.

Answer 1

Solution Basically, he has 3 options option 2 option option 3 Income of $ 85,000/year 000 years For 35 years MBA 2 yas =50,000 $yo. (paid at the beginning Income of $1,20,000 per year for 35 years - 10(60-250 of the years → Income of 1.50,000 $ For 33 years after 2 years of MBA prog. ritol I Present value of ancome of $ 85,000/ per year . for 35 years t = per year Income x 9.v. Factor of 35 years 85,000 x 9.644 - - 8197 out flow- tona Piri of anflow-for, of (working note below) = 11,86,275 - 95,450 = $ 10,90,825

@ 50,000 $ Working note : calulation of fiv. of out flow . Piv. of MBA fees of 251 year a (paid in the beggining pir. of MBA fee of Ind year = (50,000 x Piv. factor of one year) 650,000x 0.909) Total out flow- 45,450 95,450 $ (be calulation of fiv. of an flow- Income of $1,50,000 will continue to occur after 2 years. Therefore, P. r. hell be calculated as below & factor Income year & (P. v.^ of 35 years - Piv. factor of fiost 2 years) 1,50,000 X (9.644 * 1.9355) s11, 86,275 $

option 3 Piv. of Income of $ 1,20,000 For 35 years Income / year x P. v. factor for 35 years 1,20,000 X 9.6441 11.57,280 ŞI Conclusion & option 3 is perfectly ok if the marketing director is agreed for $1,20,000 l year because p.v. of Income is highest in option 3.14 If Marketing director not agreed for increased offer, then he should pursue MBA course first - and then occupied in the job opportunity costs is the benefit that one gives up by taking an alternative action. opportunity costs in this case is ancome of first 2 years that he gives up for Pressuing an MBA Course - And also if he select third option, then opportunity cost will be the MBA degree and an higher salary that he will get due to MBA degree - Nominal Income is the income without adjusted the eñect of Inflation and Real an come to vice vessa of this lie., after adjusting inflation effect

Bame ate & Suppose you have $100.000 and deposit the same axed deposit for a period of one year from date. Pas deposit at interest rate of say 8% P.a. with quarterly rest - Suppose at the time of making of cost of living P. M. is say $ 8333 33 : After one year, the fD shall be worth $108243 Suppose after one year the cost of living per Month has increased to say $8750|- The annual expenditure shall be 8750 x 12 = 1,05,000- Thus you will nel gain only 3243 le, 1082 43- 1,05,000 The interest of $8243 was notional income and - $3243 was zeal income -