QUESTION 6 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi,

Question

QUESTION 6 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi, O 2018, 2011, 2006 You are 30 years old today and are considering studying for an MBA. You have just received your annual salary of $50,000 and expect it to grow by 3% per year. MBA's typically earn $80,000 upon graduation with salaries growing by 4% per year. If you choose to attend MBA school, you would start today in one year (31st birthday.) The MBA program you are considering is a full time 2 year program that costs $30,000 per year, payable at the end of each year. You want to retire on your 65th birthday. The relevant discount rate is 8%. Is it worthwhile to quit your job in order to do an MBA (ignore income taxes for now). Start the Cash Flows with 31st Birthday. Annual Salary No MBA: Salary Growth No MBA Cost of MBA/Year Annual Salary MBA: Salary Growth MBA: Discount Rate Given the NPV of the MBA > No MBA It is worthwhile to quit your job and enter into MBA school?

Explanation / Answer

Discounting Factor 8% MBA Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Salary 0 80000 83200 86528 89989.12 93588.68 97332.23 101225.5 105274.5 109485.5 113864.9 118419.5 123156.3 128082.6 133205.9 138534.1 144075.5 149838.5 155832 162065.3 168547.9 175289.9 182301.4 189593.5 197177.2 205064.3 213266.9 221797.6 230669.5 239896.3 249492.1 259471.8 269850.7 280644.7 291870.5 303545.3 Fees -30000 -30000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Cash Flow -30000 50000 83200 86528 89989.12 93588.68 97332.23 101225.5 105274.5 109485.5 113864.9 118419.5 123156.3 128082.6 133205.9 138534.1 144075.5 149838.5 155832 162065.3 168547.9 175289.9 182301.4 189593.5 197177.2 205064.3 213266.9 221797.6 230669.5 239896.3 249492.1 259471.8 269850.7 280644.7 291870.5 303545.3 Discounting Factor 0.925925926 0.85733882 0.793832 0.73503 0.680583 0.63017 0.58349 0.540269 0.500249 0.463193 0.428883 0.397114 0.367698 0.340461 0.315242 0.29189 0.270269 0.250249 0.231712 0.214548 0.198656 0.183941 0.170315 0.157699 0.146018 0.135202 0.125187 0.115914 0.107328 0.099377 0.092016 0.0852 0.078889 0.073045 0.067635 PV of Cash Flows -30000 46296.2963 71330.58985 68688.72 66144.69 63694.89 61335.82 59064.12 56876.56 54770.02 52741.5 50788.11 48907.07 47095.7 45351.41 43671.73 42054.26 40496.69 38996.82 37552.49 36161.66 34822.34 33532.62 32290.67 31094.72 29943.06 28834.06 27766.13 26737.76 25747.47 24793.86 23875.57 22991.29 22139.76 21319.77 20530.15 Total PV if MBA opted              14,08,438.37 NO MBA Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Salary 0 50000 51500 53045 54636.35 56275.44 57963.7 59702.61 61493.69 63338.5 65238.66 67195.82 69211.69 71288.04 73426.69 75629.49 77898.37 80235.32 82642.38 85121.65 87675.3 90305.56 93014.73 95805.17 98679.33 101639.7 104688.9 107829.6 111064.5 114396.4 117828.3 121363.1 125004 128754.1 132616.8 136595.3 Discounting Factor 0.925925926 0.85733882 0.793832 0.73503 0.680583 0.63017 0.58349 0.540269 0.500249 0.463193 0.428883 0.397114 0.367698 0.340461 0.315242 0.29189 0.270269 0.250249 0.231712 0.214548 0.198656 0.183941 0.170315 0.157699 0.146018 0.135202 0.125187 0.115914 0.107328 0.099377 0.092016 0.0852 0.078889 0.073045 0.067635 PV of Cash Flows 46296.2963 44152.94925 42108.83 40159.35 38300.12 36526.97 34835.9 33223.13 31685.02 30218.12 28819.13 27484.92 26212.47 24998.93 23841.57 22737.79 21685.12 20681.18 19723.71 18810.58 17939.72 17109.18 16317.08 15561.66 14841.22 14154.12 13498.84 12873.89 12277.88 11709.46 11167.36 10650.35 10157.28 9687.032 9238.558 Total PV if MBA not opted                8,09,685.70 Since PV of opting MBA is higher, So MBA should be opted for.

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