Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 32

Cost Planning: The Cost of an MBA; Time Value of Money The motivation for getting the MBA degree has many aspects—the prestige, greater opportunity for promotion, change of occupation, and an increase in pay. To focus just on this last motivation, suppose that you are interested in getting an MBA and are studying the various programs in the United States. You want to balance the cost of getting the degree against the future benefits in increase of pay. You have information on the cost of two MBA programs, which includes the cost of tuition, living expenses, and forgone pre-MBA salary for the two years you are in the MBA program. School A has an average cost of $100,000 and School B, a far more prestigious school at which you think your grades would qualify you to be a successful applicant, has a cost of $250,000.

Required Assume that you have a five-year planning horizon, that the difference in pay for a job after both schools would remain the same for all five years, and the relevant cost of borrowing is 6 percent. Based on increase in pay only, how great would the increase for a job after leaving School B have to be relative to School A for you to be indifferent between the two schools? Hint: the present value factor for an annuity of five years at 6 percent is in Table 2 at the end of Chapter 12 and equals 4.212.

Step 1 of 4

For this question, the objective is to calculate the rate of return differences between a run of the mill average MBA program and a fairly much more expensive but highly prestigious MBA program. To do this, the aid of top magazines will be taken to figure out the expected starting salaries post-completion.

To show this we will use a metric called annuity for 5 years, which means in this context, the present benefit of the cost incurred for the MBA program received in every year of the 5 years. We will refer to this metric as present value.