this is queshion of finance it\'s A b c IV: Should You Invest in a You are now 3

Question

this is queshion of finance it's
A
b
c

IV: Should You Invest in a You are now 30 years old consideri be $20,000 per year for two I Assume tuition is paid and r essional Degree? Show your calculation to receive full credit. nd considering full time study for an MBA degree. Tuition and other direct cost wil osears. In addition, you have to give up a job with a salary of $40,000 per year. retirement of 60. an MBA dead salary received at the end of this year, a real interest rate of 2% per year, and ignore degree, you can find a job that pays a constant real amount of $45,000 and last until a

Explanation / Answer

a. In order to decide whether to go for MBA or not, you need to compare the costs & benefits associated with this degree. For this, we would calculate present value of both, costs and benefits. If benefits exceed costs, you should go for the course and vice-versa.

Formula: Present value = R x {[1 – (1+i)-n] / i}
Where, “R” is cash-flow each period, “i” is interest rate and “n” number of periods.

Costs:

Present value of Tuition Fee (Direct Cost) = $20,000*{[(1- (1+0.02)-2]/0.02}
=> $20,000* 1.941560938
= $38,831.22

Present value of salary foregone (Indirect Cost) = $40,000*{[(1- (1+0.02)-2]/0.02}
=> $40,000* 1.941560938
= $77,662.44

Total Cost in present value term = $38,831.22 + $77,662.44 = $116,493.66

b) Benefits: The benefit of MBA degree is increase salary of $5,000 from current salary levels that would start two years from now.

Increased income = $5,000
Number of periods = 60 years – 32 years = 28 Years
Interest rate = 2%

Present value of increased income when MBA is completed (2 years from now) = $5,000*{[(1- (1+0.02)-28]/0.02}
=> $5,000* 21.28127236
= $106,406.36

Benefits today in present value term = $106,406.36 / 1.022 = $102,274.47

c) NPV = PV of benefits – PV of costs
= $102,274.47 - $116,493.66 = -$14,219.19

As you can see that the benefits of doing MBA are lesser than the costs associated with it resulting in a negative NPV, you should not go for it.

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