It is estimated that over 100,000 students will apply to the top 30 M. B.A. programs in the United States this year. a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an M. B.A. degree.

b. What would you expect to happen to the number of applicants if the starting salaries of managers with M. B.A. degrees remained constant but salaries of managers without such degrees decreased by 20 percent? Why?

a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an M.B.A. degree.

Pursuing an MBA degree can be considered an investment. The investment's costs would be both the cost of taking the MBA and the opportunity costs of lost wages during the 2 year period. If you are taking a full time MBA course it will be very difficult to have a regular full time job. You might be able to work part time, but part time jobs do not pay very well specially considering that you already have a graduate degree.

Once your MBA is finished and you get your degree, the positive cash inflows should start. The net cash flows = wage holding and MBA degree - wage not holding an MBA degree.

Since this is a long term run (something like a 40 year marathon actually), you have to determine the present value of these cash flows. Since you know about NPV, once you determine the preset value of future cash flows, you subtract the investment's costs and hopefully the NPV is positive.

b. What would you expect to happen to the number of applicants if the starting salaries of managers with M.B.A. degrees remained constant but salaries of managers without such degrees decreased by 20 percent? Why?

If the salaries of managers with an MBA decrease by 20%, the net cash flows per year will decrease and might even become negative. That would result in a lower or even negative NPV. If this happens, the number of applicants for MBA courses will decrease since it will not be worth taking it.

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