Problem 3. You currently make $100,000 a year and expect your salary increase by

Question

Problem 3.  You currently make $100,000 a year and expect your salary increase by 10% a year for 20 years.   You are considering an MBA which will cost you $120,000 for the entire education. If you take the MBA, you will have to pay the full tuition today (all upfront) and you will make zero earnings at the end of years 1 and 2.  However, after graduation you’ll have an opportunity to join a premier investment bank, which promises $130,000 a year, which will grow by 15% for 18 years after graduation.  Is the MBA a good deal? Assume a constant discount rate of 15%.  What if rates fall to 10%?  What if rates rise to 17%, how does your answer change?  Show your detailed spreadsheet calculations (Alt#2). Note: salary is paid at the end of each year.

Explanation / Answer

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In case of with out MBA Year Salary PVF@15% PV 1 110000.000 0.870 95652.174 2 121000.000 0.756 91493.384 3 133100.000 0.658 87515.411 4 146410.000 0.572 83710.393 5 161051.000 0.497 80070.810 6 177156.100 0.432 76589.471 7 194871.710 0.376 73259.494 8 214358.881 0.327 70074.298 9 235794.769 0.284 67027.590 10 259374.246 0.247 64113.347 11 285311.671 0.215 61325.810 12 313842.838 0.187 58659.470 13 345227.121 0.163 56109.059 14 379749.834 0.141 53669.534 15 417724.817 0.123 51336.076 16 459497.299 0.107 49104.073 17 505447.028 0.093 46969.113 18 555991.731 0.081 44926.978 19 611590.904 0.070 42973.631 20 672749.995 0.061 41105.212 Total PV of Cash inflows 1295685.328 Now in case if I do MBA Year Cost of MBA Salary PVF@15% PV 0 -120000.000 1 -120000.000 1 0.000 0.870 0.000 2 0.000 0.756 0.000 3 130000.000 0.658 85477.110 4 149500.000 0.572 85477.110 5 171925.000 0.497 85477.110 6 197713.750 0.432 85477.110 7 227370.813 0.376 85477.110 8 261476.434 0.327 85477.110 9 300697.900 0.284 85477.110 10 345802.584 0.247 85477.110 11 397672.972 0.215 85477.110 12 457323.918 0.187 85477.110 13 525922.506 0.163 85477.110 14 604810.881 0.141 85477.110 15 695532.514 0.123 85477.110 16 799862.391 0.107 85477.110 17 919841.749 0.093 85477.110 18 1057818.012 0.081 85477.110 19 1216490.714 0.070 85477.110 20 1398964.321 0.061 85477.110 Total PV of amount after deducting MBA fees 1418587.984 here the amount after doing MBA is higher so it is a good deal Case (B) If the rates falls to 10% In case of with out MBA Year Salary PVF@10% PV 1 110000.000 0.909 100000.000 2 121000.000 0.826 100000.000 3 133100.000 0.751 100000.000 4 146410.000 0.683 100000.000 5 161051.000 0.621 100000.000 6 177156.100 0.564 100000.000 7 194871.710 0.513 100000.000 8 214358.881 0.467 100000.000 9 235794.769 0.424 100000.000 10 259374.246 0.386 100000.000 11 285311.671 0.350 100000.000 12 313842.838 0.319 100000.000 13 345227.121 0.290 100000.000 14 379749.834 0.263 100000.000 15 417724.817 0.239 100000.000 16 459497.299 0.218 100000.000 17 505447.028 0.198 100000.000 18 555991.731 0.180 100000.000 19 611590.904 0.164 100000.000 20 672749.995 0.149 100000.000 Total PV of Cash inflows 2000000.000 Now in case if I do MBA Year Cost of MBA Salary PVF@10% PV 0 -120000.000 1 -120000.000 1 0.000 0.909 0.000 2 0.000 0.826 0.000 3 130000.000 0.751 97670.924 4 149500.000 0.683 102110.512 5 171925.000 0.621 106751.898 6 197713.750 0.564 111604.257 7 227370.813 0.513 116677.178 8 261476.434 0.467 121980.686 9 300697.900 0.424 127525.263 10 345802.584 0.386 133321.866 11 397672.972 0.350 139381.951 12 457323.918 0.319 145717.494 13 525922.506 0.290 152341.016 14 604810.881 0.263 159265.608 15 695532.514 0.239 166504.954 16 799862.391 0.218 174073.361 17 919841.749 0.198 181985.786 18 1057818.012 0.180 190257.868 19 1216490.714 0.164 198905.952 20 1398964.321 0.149 207947.132 Total PV of amount after deducting MBA fees 2514023.707 here the amount also greater so doing MBA is better Case (c) If the rates rises to 17% In case of with out MBA Year Salary PVF@17% PV 1 110000.000 0.855 94017.094 2 121000.000 0.731 88392.140 3 133100.000 0.624 83103.721 4 146410.000 0.534 78131.704 5 161051.000 0.456 73457.157 6 177156.100 0.390 69062.285 7 194871.710 0.333 64930.353 8 214358.881 0.285 61045.631 9 235794.769 0.243 57393.328 10 259374.246 0.208 53959.539 11 285311.671 0.178 50731.191 12 313842.838 0.152 47695.991 13 345227.121 0.130 44842.385 14 379749.834 0.111 42159.507 15 417724.817 0.095 39637.144 16 459497.299 0.081 37265.691 17 505447.028 0.069 35036.119 18 555991.731 0.059 32939.941 19 611590.904 0.051 30969.176 20 672749.995 0.043 29116.319 Total PV of Cash inflows 1113886.416 Now in case if I do MBA Year Cost of MBA Salary PVF@17% PV 0 -120000.000 1 -120000.000 1 0.000 0.855 0.000 2 0.000 0.731 0.000 3 130000.000 0.624 81168.172 4 149500.000 0.534 79780.682 5 171925.000 0.456 78416.910 6 197713.750 0.390 77076.450 7 227370.813 0.333 75758.904 8 261476.434 0.285 74463.880 9 300697.900 0.243 73190.993 10 345802.584 0.208 71939.865 11 397672.972 0.178 70710.124 12 457323.918 0.152 69501.403 13 525922.506 0.130 68313.345 14 604810.881 0.111 67145.596 15 695532.514 0.095 65997.808 16 799862.391 0.081 64869.640 17 919841.749 0.069 63760.757 18 1057818.012 0.059 62670.830 19 1216490.714 0.051 61599.534 20 1398964.321 0.043 60546.550 Total PV of amount after deducting MBA fees 1146911.443 here the amount also greater so doing MBA is better

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