Question
Consider John. He is trying to decide whether or not to enter a full-time MBA program. Currently, he works for IBM as a systems analyst
Consider John. He is trying to decide whether or not to enter a full-time MBA program. Currently, he works for IBM as a systems analyst earning $75,000 per year. With an MBA he could transfer to IBMs finance division, starting at $110,000 per year. His wage increases as an analyst would just be at cost-of-living and would be 4% per year. His wage increases in the finance division would be 8% per year. The MBA is a two-year program and costs $15,000 per year. Johns time horizon is 6 years. (Assume for simplicity that expenses are due at the start of a year, but earnings flow in at the end of a year.)
a. Draw an age-earnings profile for John to represent these two alternatives.
b. If the market interest rate is 5%, what decision would your recommend for John based on Net Present Value calculations? Show your work and your calculations.
c. How would your answer to (b) change if the appropriate interest rate is 10%? If the appropriate interest rate is 2%? Explain. Recalculate the value of each investment at 10% and then 2%, and compare your numbers.
d. What other factors would be important for John to consider as he makes this decision? Explain.
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