You are considering enrolling in a 2-year long on-line MBA program. You will continue your current employment. If you do, you must pay two payments of $20,000; the first happens today, at the beginning of the program, and the second is due 1 year from today, at the beginning of the second year.Because of this advanced degree, you expect your annual earnings stream will increase; this increase will occur after you complete the 2-year program. You plan on working for 25 years after you graduate. Remember that in capital budgeting, we assume that cash flows from the operations/activity happen at the end of the year.

To finance this program, you will withdraw money from your investment portfolio, which is currently earning an average of 7%. Thus, you have decided that any use of these funds should earn at least 7%.

What is the annual increase in earnings necessary to make this investment worthwhile? This annual increase in earnings can be considered an annuity.