Reference no: EM133232323
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).
Now, 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 value1 (PDV) of not getting an MBA (in thousands of dollars) is: ??????(???? ??????) = 100 + 0.9 ∗ 100 + 0.92 ∗
100 + ... + 0.939 ∗ 10 = 100 ∗ 1 - 0.940
1 - 0.9 = 985.2
This comes from the formula for a finite geometric sum. Calculate the PDV of getting an MBA. (Hint: if you are not comfortable with using the geometric sum formula, you may find it useful to check your work in Excel). Is it still favorable for her to get an MBA?
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