Question
Since graduating, Janet has been working at a prestigious consulting company as an entry-level analyst with earnings of exactly $100,000 (let's say this includes benefits,
Since graduating, Janet has been working at a prestigious consulting company as an entry-level analyst with earnings of exactly $100,000 (let's say this includes benefits, bonuses, and is net of current cost of living). Janet has reached a point where she will not advance any further in the company without an MBA. Suppose for simplicity that without an MBA, she will earn $100,000 over the course of the next forty years until retiring at age 65. If she does choose to get an MBA, it will take her 2 years to earn the MBA, and her salary will be increased to $150,000 when she returns to the company. She has an offer from Columbia Business School in New York, where tuition and a high cost of living will cost roughly $100,000 per year. She cannot work while attending business school. Suppose that Janet will be able to take out an interest-free loan (or equivalently, that she is able to pay fully out of pocket).
- Consider that income today is more valuable to Janet than income in the future. Suppose that Janet's utility is linear in income (() = ) and that her utility from earning $1 next year is equal to utility from earning $0.90 today ( () = 0.9 +1()). In this example, 0.9 is Janet's "discount rate". The present discounted value (PDV) of not getting an MBA (in thousands of dollars) is: ( ) = 100 + 0.9 100 + 0.9^2 100 + + 0.9^39 10 = 100 ((1 0.9^40)/1 0.9) = 985.2 This comes from the formula for a finite geometric sum. Calculate the PDV of getting an MBA.
- From question 1, Is it still favorable for her to get an MBA?
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