Use the following to answer questions 1 and 2.
Your sister Mandy is in her final semester of school, getting ready to graduate with a Bachelor of Science degree in healthcare management. She has been working as a radiology tech for a local hospital earning $40,000 per year with guaranteed pay increases of $5,000 every five years. Your sister is considering returning to school to further her education. She has applied, and been accepted, into two different programs, and is trying to decide which option makes the most financial sense, given that she is planning to retire at the age of 65. Knowing that you have just finished taking a finance class, Mandy has turned to you for help making a decision.
- The first option is a one year advanced radiology certificate program. After earning the certificate, she will automatically be eligible for a $10,000 increase in her annual salary (her salary will increase $5,000 every five years until she retires… that is, after completing the certificate she will receive a pay increase of $10,000 for a total of $50,000 per year. After another 5 years, her salary will increase to $55,000 per year. Five years later her salary will increase by another $5,000 and so on). Mandy will be completing the certificate outside of normal work hours, so she will not lose any income during this time. The total cost of the program is $5,000, due when she begins in the program.
- Mandy’s second option is to return to school to earn an MBA degree, which will allow her to be promoted to a managerial position within her firm. The position comes with an increase of $20,000 in her annual salary, and cost of living adjustments of $5,000 every 5 years. The MBA program will take three years and costs $25,000 per year, due at the beginning of each year. She will attend evening classes, so Mandy will not lose any income while working towards her MBA degree.
- Answer according to the following assumptions:
o Salaries are paid once per year at the end of each year.
o Each salary increase will become effectively immediately upon graduating from either program. Because salaries are paid at the end of each year, the first salary increase will be paid exactly one year after graduation.
o Assume the certificate and MBA programs are mutually exclusive.
o Your sister will turn 30 the day she begins either of the programs.
o The appropriate discount rate is 10%
1.What is the value of undertaking the MBA program? Round up to the nearest whole dollar.
2.What should Mandy do?
- Earn her certificate
- Earn her MBA
3.This week’s Mega Millions jackpot is $50 million and you hold the only winning ticket. You are given the option of taking a one-time lump sum payment of $15 million or receiving annuity payments of $1 million per year for 40 years with an additional lump sum payment of $10 million dollars after 40 years. The appropriate discount rate is 10%. Should you take the lump sum or opt for the yearly payments?
- Lump sum
- Yearly payments