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You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted into medical school is about 10 percent. If you are accepted into medical school, then your starting salary when you graduate will be $300,000 per year. However, if you are not accepted, then you would choose to work in a zoo, where you will earn $40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary?

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Elin HesselLv2
25 Jan 2019
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7.3 Expected returns: You have chosen biology as your college majorbecause you would like to be a medical doctor. However, you findthat the probability of being accepted into medical school is about10 percent. If you are accepted into medical school, then yourstarting salary when you graduate will be $300,000 per year.However, if you are not accepted, then you would choose to work ina zoo, where you will earn $40,000 per year. Without consideringthe additional educational years or the time value of money, whatis your expected starting salary as well as the standard deviationof that starting salary?

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 $38,000 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 $48,000 per year. After another 5 years, her salary will increase to $53,000 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 to complete 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:

Salaries are paid once per year at the end of each year.

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.

Assume the certificate and MBA programs are mutually exclusive.

Your sister will turn 30 the day she begins either of the programs.

The appropriate discount rate is 8%

Question 1

What is the value of undertaking the MBA program? Round up to the nearest whole dollar.

Question 2

What should Mandy do?

Nothing
Earn her certificate
Earn her MBA

Budget Cutting Time in a Public Middle School

You are the principal for a rural middle school located in the northwest. You are directly responsible for ensuring the education of 800 students and supervising 45 teachers and 15 support staff. You thought you had an operating budget of $2,200,000, but budget cutbacks have reduced your funding by $200,000. It is mid June, and you know you will not be able to get any more money for the upcoming school year. In addition, student enrollments have been increasing steadily over the past few years and are currently at record levels. The teachers, support staff, and school board all know about the budget cutbacks, and state law forbids public schools from carrying over any debt into the next school year.

Dwayne Jones has been at the school for ten years and recently was voted to be president of the teachers' union. You have always gotten along well with Dwayne, but have had several disagreements about the administration's ability to assess a teacher's impact in the classroom. You feel that teaching is no different than any other profession, and a teacher's ability to make classes interesting and convey knowledge can be assessed through observations made by the administration staff and national testing scores. Dwayne believes it is impossible to adequately assess the impact teachers have on students, and as a result feels all salary, promotion, and termination decisions should be made on the basis of seniority, not merit. You have observed all of the teachers in your school several times over the past year, and you feel six of them are incompetent. In addition, these six teachers have more complaints from students and parents combined than the all of the remaining teachers at the school. However, these six teachers have been at the school an average of eight years and were staunch supporters of Dwayne during the election for union president. Dwayne had promised his constituents he would work hard to ensure all personnel decisions involving teachers would be solely based on seniority. The union contract allows you to terminate ineffective teachers, and you would save $180,000 through this personnel decision (each of these teachers makes about $30,000). However, the contract also specifies both you and the union president must agree before this termination decision can become official. When you tell Dwayne your ideas about eliminating the ineffective teachers, he stated he would not go along with the idea and suggested you eliminate the eight most junior teachers at the school instead. All eight of these teachers are young, have less than two years of teaching experience, and have proven to be enthusiastic and effective teachers. Because each of these less experienced teachers make approximately $20,000 per year, you could save the school $160,000 by choosing this option.

The school has three full time physical education teachers and supports 12 male and female athletic teams. You are good friends with all three physical education instructors, and two of the members of the school board have children on at least one of the athletic teams. Because all three physical education teachers have been at the school a number years, eliminating physical education from the school's curriculum would save $120,000 in teachers' salaries and $70,000 in athletic team support.

The school has 15 non-union support staff who do jobs ranging from administrative support, custodial and maintenance work, library management, and food services support. You have always felt the support people were the glue that held the school together, and many of them attended the school as teenagers and all will go the extra mile to ensure the school runs well. The support personnel tend to be fairly senior, as the most junior has six years of experience and the most senior has over 30 years of experience. Cutting out the school hot lunch program would eliminate four food services positions ($50,000) and the school's funding obligation in support of the program ($80,000). Eliminating two of the five administrative staff positions would save $35,000, one of the two library positions $17,000, and two of the four custodial positions would save $28,000.

The school has special math, science, and English programs for talented and gifted students. Elaine Simpson teaches these programs, and she has been very successful at getting her students to do well in local and state math, science, and English competitions. You will save approximately $25,000 by eliminating a teaching position and $3,000 in support funds if you cut this program from the school curriculum.

The school board would like to see your plan for dealing with the budget crisis, and they want to meet with you in two weeks. What are your recommendations?

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