Based On The EV Salary Calculated In Q2, Determine The Break

Based on the EV salary calculated in Q2, determine the breakeven point for Kim’s MBA education for the two programs. Assume that she earns a 5% pay increase per year after graduation. If Kim was using breakeven or payback as the only criteria for deciding which program to join, then which MBA program will she choose?

Question 4 requires analyzing the breakeven point for Kim's MBA investments based on the expected value (EV) salaries obtained in Question 2. To make an optimal decision, it is essential to understand how the initial costs, potential salary increases, and time to recover these costs influence her choice. This analysis involves projecting future earnings post-graduation, incorporating a 5% annual pay increase, and determining the time required to recover the initial investment through increased earnings.

Introduction

Deciding whether to pursue an MBA is a complex financial decision that encompasses evaluating potential salary gains against the costs of education and lost income opportunities. In Kim's scenario, the decision hinges on understanding the breakeven point—the time needed for her increased earnings to offset her educational expenses. Specifically, she faces two program options, each with different costs, salary prospects, and associated risks, characterized by expected salaries derived in Question 2. Calculating the breakeven point allows Kim to compare the time horizons required to recover her investments and guides her in selecting the program with the best overall financial return.

Methodology

The analysis begins with the EV salaries from Question 2 for both programs. These salaries serve as the baseline for projecting future earnings, assuming a 5% annual salary increase. The calculation involves determining the cumulative difference in earnings over time, factoring in initial costs and potential lost income during study periods. The core formula assesses the payback period where the cumulative incremental earnings equal the initial investment plus any tuition costs. This allows for a direct comparison of how quickly each program pays off and influences the decision-making process.

Calculating the Breakeven Point

Let us denote:

• C_i = initial cost of program i (including tuition and other costs)
• I = initial income (current salary $65,000)
• EV_i = expected salary after graduation for program i obtained in Question 2
• g = annual growth rate in salary (5%)
• t = number of years needed to breakeven

The future salary after t years, considering annual growth, is calculated as:

S_i(t) = EV_i * (1 + g)^t

The cumulative additional earnings after graduation at year t are:

CE_i(t) = (S_i(t) - I) * t

The breakeven point, t_break, occurs when:

∑_k=1^t (S_i\_k - I) = C_i

This calculation involves iterative processes or algebraic approximations using present value techniques. For simplicity, we will approximate the payback period by solving for t in the following equation:

C_i ≈ (EV_i - I) * [(1 + g)^t - 1] / g

Results

Assuming the initial investment costs for Program 1 and Program 2 are known (for example, $50,000 and $70,000, respectively), and the EV salaries from Question 2 are, say, $100,000 for Program 1 and $110,000 for Program 2, we substitute into the formula to estimate the payback period.

For Program 1:

t₁ ≈ ln[1 + (g * C₁) / (EV₁ - I)] / ln(1 + g)

Similarly for Program 2:

t₂ ≈ ln[1 + (g * C₂) / (EV₂ - I)] / ln(1 + g)

Using these calculations, the program with the shorter payback period indicates a quicker recovery of investment, making it the more financially attractive choice if payback period is the sole criterion.

Discussion and Conclusion

Based on the calculated breakeven points, Kim can select the program with the shortest payback period — indicating which program allows her to recover her educational costs faster. If the educational costs are significantly different, and the expected salaries are close, the program with the faster payback should be prioritized. Conversely, if one program offers a substantially higher expected salary, it may offset a longer payback period.

Moreover, this analysis should be complemented with non-financial factors such as career growth opportunities, personal preferences, networking potential, and job satisfaction to make a comprehensive decision. Human capital investments like education are multifaceted, and financial metrics alone might not capture the full scope of benefits or risks involved.

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