Ian received an undergraduate degree in finance four years ago and has been empl

Question

Ian received an undergraduate degree in finance four years ago and has been employed all this time at a mid-size wealth management company. His initial salary was $65,000 per year and increased 4.0% every year. Ian decided that his four-year stint at this employer has prepared him well for an MBA degree. He applied to several schools and was accepted by one of the top-10 programs in the county. Ian notified his manager about his decision yesterday, but today the manager made him the following offer: Ian will be assigned to lead a very important project with immediate salary increase of 10%. The manager assured him that for the following four years his annual raise will be at least 5%. Ian is planning to make his decision (quit and go to school or stay and lead the project) based on the cumulative earnings in the next 20 years (no discounting and ignoring taxes). He plans to stop working in exactly 20 years regardless of his decision and become a gentleman farmer.

a. Build a spreadsheet with Ian’s cash flows for the next 20 years and calculate cumulative earnings for two scenarios: (1) stay and lead the project and (2) enroll into MBA program; assume the following: Ian estimates that the two-year MBA program will cost $100,000 per year in tuition and other expenses; his starting salary after MBA is expected to be $120,000 and will grow 3.0% per year, the same growth rate that Ian expects his salary will grow at his current employer after the 5% raises are over. What scenario should Ian pick?

b. What should the immediate adjustment to his current salary be to make Ian indifferent between two scenarios? (Hint: use solver function in Excel)

Explanation / Answer

I could not upload excel here so i have done it in google spreadsheets will end you the link.

https://docs.google.com/spreadsheets/d/1AURXJcYkA9fAMVrNMjZ5fLNrqL7K_XyKhQ1yec2Ut7U/edit?usp=sharing

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