Suppose that you are now in your final semester of your MBA programme and you are faced with the choice of either getting a job when you graduate or continuing your study for a doctoral degree. Of course, your choice is not purely financial. However, to make an informed decision, you would like to know the financial implication of the two alternatives. Let’s assume that your opportunities are as follows:

If you take the “get a job” route, you expect to start off with a salary of RM40,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 5 percent per year until you retire 40 years.

As a PhD candidate, you will be paying RM25,000 per year tuition for each of the three years you registered with the graduate school. However, after you have earned the Phd programme, you can then expect a job with a starting salary of RM70,000 per year. Moreover, you expect your salary to grow by 7 percent per year until you retire 35 years later.

Clearly, your total expected lifetime salary will be higher if you pursue your study at the doctoral level. However, the additional future salary is not free. You will be paying RM25,000 in tuition at the beginning of each of the three years of your doctoral candidature. In addition, you will be giving up a little more than RM126,000 in lost income over the three years of full-time study: RM40,000 the first year, RM42,000 the second year, and RM44,100 the third year.

A. Assuming the discount rate is 9 percent and salaries will be paid at the end of each working year, which option is better financially?
(20 marks)

B. What is the present value of the tuition fees? What is the difference if the fees are paid at the end of the year?
(5 marks)

Please note that no one here will do your work for you. However, we will be happy to read over what YOU THINK and make suggestions and/or corrections.


Please post what you think.

To determine which option is better financially, we need to calculate the present value of the expected lifetime salaries for each option. This will give us a comparison of the total value of salaries for each choice.

A. To calculate the present value, we will discount each salary payment back to the present using a discount rate of 9 percent. We will then sum up the discounted salaries to get the total present value for each option.

For the "get a job" route:
1. Start with a salary of RM40,000 per year.
2. Assuming the salary grows at 5 percent per year, we can calculate the future salaries using the formula: Salary * (1 + Growth Rate)^Number of Years. In this case, we have 40 years of expected working life.
- First year salary: RM40,000
- Second year salary: RM40,000 * (1 + 0.05) = RM42,000
- Third year salary: RM42,000 * (1 + 0.05) = RM44,100
- Continuing this pattern, we can calculate the future salaries for each year until retirement.
3. Discount each salary back to the present using the discount rate of 9 percent. The formula to calculate the present value is: Salary / (1 + Discount Rate)^Number of Years.
4. Sum up all the present values for the expected working years.

For the "PhD candidate" route:
1. Start with a salary of RM70,000 per year.
2. Assuming the salary grows at 7 percent per year, we can calculate the future salaries using the same formula as above.
3. Discount each salary back to the present using the discount rate of 9 percent.
4. Considering the additional costs, subtract the tuition fees and lost income from the present value of salaries for the "PhD candidate" option.

By comparing the total present values for each option, we can determine which one is better financially.

B. To calculate the present value of the tuition fees, we need to discount them back to the present using the discount rate of 9 percent. The present value of tuition fees can be calculated using the formula: Tuition Fees / (1 + Discount Rate)^Number of Years. We can also calculate the difference in present value if the fees are paid at the end of the year by applying the same discount rate.

Once we have the necessary information and perform the calculations, we will be able to answer both questions and make the financial comparison between the two options.