Question

5. Suppose that soon after earning your bachelor's degree you are accepted into an MBA program at a prestigious university. It is an intensive program that would require you to be a full-time student for about eighteen months. What are the major financial costs and benefits of enrolling in this program? (Hint: be sure to consider not just the out-of-pocket costs, but also any other financial sacrifices you might have to make if you became a full-time student.) Describe how you could evaluate whether enrolling in this program is a good financial decision. (Hint: Keep in mind that the benefits of your education will be in the form of higher cash flows over your entire career.)

Answer 1

	EXPENSES FOR MBA OPTION
	Opportunity Cost : Loss of Salary
	Annual Tuition fees	$60,000	(Assumed)
	Books and other supplies per year	$3,000	(Assumed)
	Additional cost on health insurance per year	$6,000	(Assumed)
	Additional cost on room and board per year	$5,000	(Assumed)
	Moving expense (one time)	$2,000	(Assumed)
	BENEFITS:
	Sign on bonus on new job	$20,000	(Assumed)
	Increased salary	$100,000	(Assumed in first year)
	Increased growth in salary	4.50%	(Assumed)
	Increased Social recognition and job satisfaction
	CURRENT JOB
	Present Salary (paid in year1)	$70,000	(Assumed)
	Tax Rate	22%	(Assumed)
	Salary growth rate	3.5%	(Assumed)
	After tax salary in year1	$54,600	(70000*(1-0.22)
	After tax salary in year2	$56,511	(54600*1.035)
	After tax salary in year(N+1)=1.035*After tax Salary in Year(N)
	MBA OPTION
	Total annual expenses in Year0	$76,000	(60000+3000+6000+5000)+moving expense 2000
	Total annual expenses in Year1	$74,000	(60000+3000+6000+5000)
	Annaul Salary in 3	$100,000
	After tax salary in Year3	$70,000	(100000*(1-0.30)
	After tax salary in Year4	$73,150	(75900*1.045)
	After tax salary in year(N+1)=1.045*After tax Salary in Year(N)
	Signing Bonus in Year2	$20,000
	Present Value of Cash Flow=(Cash Flow)/((1+i)^N)
	i=discount rate =7.1%=0.071(Assumed)
	N=Year of Cash Flow
	Total Present Value of Current Job	$972,895
	Total Present Value of MBA	$1,040,022
	MBA Option should be selected
	N	Continue Current Job		MBA Option
		CF1	PV1=CF1/(1.071^N)	CF2	PV2=CF2/(1.071^N)
	Year	Cash Flow	Present Value	Cash Flow	Present Value
	0			($76,000)	($76,000)
	1	$54,600	$50,980	($74,000)	($69,094)
	2	$56,511	$49,267	$20,000	$17,436
	3	$58,489	$47,611	$70,000	$56,981
	4	$60,536	$46,010	$73,150	$55,598
	5	$62,655	$44,464	$76,442	$54,248
	6	$64,848	$42,969	$79,882	$52,931
	7	$67,117	$41,525	$83,476	$51,646
	8	$69,466	$40,129	$87,233	$50,392
	9	$71,898	$38,780	$91,158	$49,169
	10	$74,414	$37,477	$95,260	$47,975
						$74,414 $37,477 $95,260 $47,975 Continue Current Job MBA Option N PV2=CF2/(1.071AN)| PV1 CF1/(1.071AN) CF1 CF2 Year Cash Flow Present Value Cash Flow Present Value $77,019 $36,217 $99,547 $46,811 11 $79,714 $35,000 $104,027 $108,708 $45,674 12 $82,504 $33,823 $44,565 13 $85,392 $32,686 $113,600 $43,484 14 $88,381 $31,588 $118,712 $42,428 15 $91,474 $30,526 $124,054 $41,398 16 $94,676 $29,500 $129,636 $40,393 17 $97,989 $28,508 $135,470 $39,412 18 $101,419 $27,550 $141,566 $38,456 19 $26,624 $104,969 $147,936 $37,522 20 $108,642 $25,729 $154,594 $36,611 21 $112,445 $24,864 $161,550 $35,722 22 $116,381 $24,028 $168,820 $34,855 23 $120,454 $23,221 $176,417 $34,009 24 $124,670 $22,440 $184,356 $33,183 25 $129,033 $21,686 $192,652 $32,378 26 $133,549 $20,957 $201,321 $31,592 27 $138,224 $20,252 $210,380 $219,848 $30,825 28 $143,061 $19,572 $30,076 29 $148,069 $18,914 $229,741 $29,346 30 SUM $972,895 SUM $1,040,022 10