Your brother, age 40, is the regional manager at an office supply company. He th

Question

Your brother, age 40, is the regional manager at an office supply company. He thinks he might want to leave his job to go back to school for an MBA. He expects that his current job, if he were to stay at it, would pay him a real income stream of $75,000 per year until retirement at age 65. If he goes back to school, he would forego two years of income, but his real income after graduation would be $115,000 per year until retirement at age 65. He has been accepted to an MBA program that costs a real $22,000 per year. If his real opportunity cost is 8 percent, would leaving his job to get an MBA be a smart financial decision?

Explanation / Answer

Let's calculate the present value of cash flows without an MBA using PV function

N = 25, PMT = 75,000, I/Y = 8%, FV = 0 => Compute PV = $800,608

With an MBA, the present value of cash flows after two years

N = 23, PMT = 115,000, I/Y = 8%, FV = 0 => Compute PV = $1,192,672

Its value today = 1,192,672 / (1 + 8%)^2 = $1,022,524

PV of MBA costs = 22,000 / 1.08 + 22,000 / 1.08^2 = $39,232

PV of income after MBA = 1,022,524 - 39,232 = $983,292

As the PV of income after an MBA is greater than the PV of income without an MBA, he should get an MBA.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.