You are considering quitting work for two years to earn an MBA. Your current job pays $25,000 per year (after taxes), but you
could earn $55,000 per year (after taxes) if you had a MBA at Southern University. Tuition is $10,000 per year and the cost of an
apartment near campus is equal to the $8,000 per year you are currently paying. The relevant discount rate is 7 percent per year.
You just turned 52 and plans to retire when you turn 60, whether or not you get your MBA. Based on this information, justify
your planned MBA at Southern University.
To determine whether pursuing an MBA at Southern University is a financially viable decision, we need to calculate the present value of the cash flows associated with both scenarios: remaining in your current job and earning an MBA.
First, let's calculate the present value of the cash flows for remaining in your current job for the next 8 years (from ages 52 to 60). We'll assume that the after-tax salary of $25,000 remains constant throughout this period.
PV_CurrJob = $25,000 / (1 + 0.07)^8 = $18,542.68
Next, let's calculate the present value of the cash flows for pursuing an MBA at Southern University for 2 years and then working for the next 8 years (from ages 52 to 60) with an after-tax salary of $55,000.
PV_MBA = -$10,000 (tuition cost) + $55,000 (annual salary) - $8,000 (apartment cost) / (1 + 0.07)^2 + $55,000 / (1 + 0.07)^3 + $55,000 / (1 + 0.07)^4 + ... + $55,000 / (1 + 0.07)^9
Using the formula for the present value of an annuity, we can simplify this calculation:
PV_MBA = -$10,000 + $55,000 [1 / (1 + 0.07)^2 + 1 / (1 + 0.07)^3 + 1 / (1 + 0.07)^4 + ... + 1 / (1 + 0.07)^9]
Using the formula for the sum of a geometric series, we can further simplify this calculation:
PV_MBA = -$10,000 + $55,000 [1 - (1 + 0.07)^-8] / 0.07
PV_MBA = -$10,000 + $55,000 [1 - 0.546956324] / 0.07
PV_MBA = -$10,000 + $55,000 (0.453043676) / 0.07
PV_MBA = -$10,000 + $310,739.82
PV_MBA = $300,739.82
Now, let's compare the present values of the two scenarios:
PV_MBA > PV_CurrJob
$300,739.82 > $18,542.68
Based on the calculations, pursuing an MBA at Southern University is justified from a financial standpoint. The present value of the cash flows associated with earning an MBA is significantly higher than the present value of the cash flows from remaining in your current job. Therefore, pursuing the MBA would likely result in greater financial benefits over the long term, especially considering your plans to retire at 60.