Hi, i need some help on my managerial finance course.
You are 25 and just about to graduate from college. You are considering whether to go to Business School right after college or take the job that you have been offered. Being finance major, you reckon that in order to make the most optimal decision you need to do a financial analysis of the two options available to you. The salary offer for your new job is $70,000 which is expected to grow at the rate of 3% per annum. MBAs typically make around $95,000 upon graduation, with salaries growing at a rate of 4% per annum. The MBA program costs $20,000 per year in tuition, payable at the end of each year of study. You hope to retire when you reach age 60. Your relevant discount rate is 7.5%. Using the above information and Excel modeling, please answer the following questions:
a. Is it worthwhile for u to decline the job offer and go straight to school?
b. What is the internal rate of return for the MBA program?
c. What rate of return would make you indifferent between the 2 options?
Think it through,
In Excel, calculate the present value of the income stream till age 60 under both options.
A coupla a complications to think about. First, I personally would think that tuition costs ought to be paid for with borrowed money. So, I would add borrowing costs to the MBA tuition. Second, I might think about factoring in some probability of dying. Third, I might think about adding some risk probabilities.
To answer these questions using Excel modeling, you can follow these steps:
Step 1: Create a table in Excel with the following columns: Year, Salary (job offer), Salary (MBA graduate), Tuition, Net Cash Flow (Salary - Tuition), PV Factor(using the discount rate of 7.5%), PV of Net Cash Flow (Net Cash Flow * PV Factor).
Step 2: Fill in the table for each year from the present year until your desired retirement age (60 years old).
Step 3: Calculate the present value of the job offer salary by discounting it back to the present value using the PV Factor.
Step 4: Calculate the present value of the MBA program by summing up the present values of the net cash flows for each year.
Step 5: Compare the present values from step 3 and step 4.
a. To determine whether it's worthwhile to decline the job offer and go straight to school, compare the present value of the job offer salary to the present value of the MBA program. If the present value of the MBA program is greater than the present value of the job offer, it is worthwhile to decline the job offer and go to school.
b. To calculate the internal rate of return (IRR) for the MBA program, use the IRR function in Excel. In a new row of the table, input the negative tuition values for each year and the net cash flow values as positive for the graduation year. Then use the IRR function to calculate the IRR.
c. To determine the rate of return that would make you indifferent between the two options, you can use the Goal Seek function in Excel. Set up the goal seek by setting the present value of the job offer salary and the present value of the MBA program to be equal, then vary the MBA program's rate of return until the present values are equal.
By following these steps and using Excel, you can easily find the answers to the questions regarding your decision between the job and the MBA program.