Question

Stephen Owsu is deciding whether he should get into the MBA program at a state university or not. The tuition and books for this program will cost him $60,000. If he starts the MBA program, he has to give up his current position as a financial advisor at Edward Jones which pays him $42,000 a year (after tax). On average, an MBA graduates will make an extra $25,000 per year over a business career of 40 years. Stephen find his opportunity cost of capital to be 5%. Given this scenario, find the NET PRESENT VALUE of getting the MBA degree and discuss whether this is a good decision to take or not.

Answer 1

Net present value = Present value of cash inflow - Present value of cash outflow
In this case we would calculate net present value of MBA degree
Present value of annuity	Incremental revenue*(1-((1+r)^-n)/r
where r is interest rate and n is number of years
Present value of incremental salary	25000*(1-(1.05^-40))/0.05
Present value of incremental salary	25000*17.42321
Present value of incremental salary	$428,977.16
Present value of incremental cash outflow	-$60,000.00
Net present value	$368,977.16	(428977.16-60000)
Thus, net present value of getting MBA degree is $368,977.16
Thus, Stephen's decision to persue MBA is good as NPV is positive