Tuesday
October 21, 2014

Homework Help: corporate finance

Posted by ria on Monday, April 2, 2012 at 6:58am.

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)



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