1. You graduated from Loyola two years ago, and you are now earning a salary of $50,000 per year. The total cost of your Loyola education was $200,000. You are now thinking about earning an MBA degree. Because of your excellent education at Loyola, you are eligible for the one-year, accelerated program at Global University, which has a cost of $120,000 for tuition, room, board, books, etc. To earn the MBA, you would have to quit your job and study full-time. As you are deciding what to do, your manager at work tells you that, based on your outstanding performance, you will be promoted in one month; the new position will carry a salary of $60,000 per year, or $10,000 more than you are earning now. You estimate that the MBA will translate into the following incremental after-tax earnings for the next ten years, which is your decision horizon:

Incremental

Year After-tax Earnings

1 $15,000

2 20,000

3 23,000

4 26,000

5 30,000

6 35,000

7 40,000

8 50,000

9 60,000

10 70,000

You have a discount rate of 10.0%. Lastly, in order to get to/from class, you

will need to spend more on transportation, and you will also have to eat

several meals a week at fast food restaurants. These incremental net

working capital costs will be $3,000 for the year. Your on-going fixed

overhead costsfor rent, clothes, insurance, food, etc.are $20,000 per

year.

USING THE PRECEDING INFORMATION, PLEASE ANSWER THE

FOLLOWING QUESTIONS:

1. What is your

1. Sunk cost?
2. Fixed overhead cost?
3. Project cost?
4. Erosion?
5. Opportunity cost?
6. Incremental net working capital cost?

2. Combining all appropriate costs, what is the total cost of the MBA?
3. What is the present value of the incremental after-tax earnings?
4. What is the net present value of the MBA?
5. Should you pursue the MBA?
6. Should you factor in financing costs?
7. Should you factor in on-going fixed overhead costs?