Question

You are 25 years old and are considering full-time study for an MBA degree. Tuition and other direct costs will be $60,000 per year for two years. In addition, you will have to give up your current job that has a salary of $50,000 per year. Assume tuition is paid and salary received at the end of each year. By how much does your salary have to increase (in real terms) as a result of getting your MBA degree to justify the investment? Assume a real interest rate of 2% per year, ignore taxes, assume that the salaries for both jobs increase at the rate of inflation (i.e. they stay constant in real terms), and that you retire at 65. Note: the $1 for T periods annuity formula is (1/r)*[1-1/(1+r)^T]. g

Answer 1

To justify the investment in an MBA degree, your salary would need to increase by approximately $412,428 in real terms over your working career.

Step-by-step explanation:

To determine how much your salary would need to increase in real terms to justify the investment in an MBA degree, we need to consider the costs and benefits.

1. The total cost of the MBA degree over two years is $60,000 per year, which amounts to a total cost of $120,000.
2. By giving up your current job that pays $50,000 per year, you will lose this salary for two years, resulting in a loss of $100,000.

Therefore, the total cost of obtaining the MBA degree would be $220,000 ($120,000 in tuition costs + $100,000 in lost salary).

To determine the salary increase needed to justify this investment, we need to calculate the future value of the lost salary. Assuming a real interest rate of 2% per year and a retirement age of 65, we can use the formula for the future value of an annuity:

(1/r) * [1 - (1/(1+r)^T)]

Plugging in the values, we get:

(1/0.02) * [1 - (1/(1.02)^40)] = approximately $412,428

This means that your salary would need to increase by $412,428 in real terms over your working career to justify the investment in the MBA degree.

Answer 2

$8,403.73

Step-by-step explanation:

The job will be started at the age of 27 ( 25 years + 2 years ) and retirement will be at the age of 65.

Hence the employment years are 38 years ( 65- 27 ).

Cost of MBA program = Direct cost + Opportunity cost = $60,000 + $50,000 = $110,000

At the age of 27, the total cost of the program will be

Total Cost of MBA program = Cost of program in first year + Cost of program in last year = $110,000 + ( $110,000 x ( 1 + 2% ) ) = $110,000 + $112,200 = $222,200

Use the following formula to calculate teh required salary

Calculate the annuity factor

Annuity factor = (1/r)*[1-1/(1+r)^T] = (1/2%)*[1-1/(1+2%)^38] = 26.440640602064

Now use the following formula to calculate the required salary

Required salary = Total cost of MBA program / Annuity factor for 38 years at 2% = $222,200 / 26.440640602064 = $8,403.73