Question

THE MBA DECISION

Lexy Halliday graduated four years ago with degrees in accounting and finance. She has been employed in the finance department at Thorvaldsen Conglomerated (TC) since graduation. She is satisfied with her current job, but is considering an MBA degree to increase her skills and her advancement prospects. She has examined a number of MBA schools. She has narrowed her choices to 1) staying in her current job, 2) getting an MBA at Arrington University (AU) or 3) getting an MBA at Boyden College (BC).

Lexy’s annual salary at TC is $70,000 per year and she expects it to increase at 3.5 percent per year until retirement. She is currently 26 years old and plans to retire in 30 years. Her current job includes a fully paid health insurance plan and her current average tax rate is 22 percent. Lexy has a savings account with enough money to cover the entire cost of her MBA program.

The Mason College of Business at Arrington University is a top MBA program. An AU MBA degree requires two years of full-time enrollment. Annual tuition is $60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Lexy expects that after graduation from AU, she will receive a job offer for about $100,000 per year, with a $20,000 signing bonus. She expects the salary at this job to increase at about 4.5 percent per year. Because of the higher salary, her average income tax rate will increase to 30 percent.

The Jensen School of Business at Boyden College (BC) began its MBA program 16 years ago. The Jensen School is smaller and less well known than the school at AU. BC offers an accelerated, one-year program, with a tuition cost of $50,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,000. Lexy expects to receive an offer of $85,000 per year with a $10,000 signing bonus after graduation from BC. The salary at this job is expected to increase at 4% per year and her average income tax rate at this level of income is expected to be 25 percent.

Assume that once Lexy makes her decision she will immediately begin school. She will need to move and her health insurance and living expenses will change. Both schools offer a health insurance plan that will cost $6,000 per year payable at the beginning of the year. Moving expenses are $2,000 and Lexy estimates that room and board expenses for either school will cost $5,000 more per year than her current living expenses, payable at the beginning of the year. Lexy estimates that the appropriate discount rate for her analysis is 7.1 percent. Assume that all salaries are paid at the end of each year.

1. How does Lexy's age affect her decision to get an MBA?

Please show all work. Thank you.

Answer 1

	CURRENT JOB
	Present Salary (paid in year1)	$70,000
	Tax Rate	22%
	After tax salary in year1	$54,600	(70000*(1-0.22)
	After tax salary in year2	$56,511	(54600*1.035)
	After tax salary in year(N+1)=1.035*After tax Salary in Year(N)
	MASON COLLEGE OPTION
	Total annual expenses in Year0	$76,000	(60000+3000+6000+5000)+moving expense 2000
	Total annual expenses in Year1	$74,000	(60000+3000+6000+5000)
	Annaul Salary in 3	$100,000
	After tax salary in Year3	$70,000	(100000*(1-0.30)
	After tax salary in Year4	$73,150	(75900*1.045)
	After tax salary in year(N+1)=1.045*After tax Salary in Year(N)
	Signing Bonus in Year2	$20,000
	JENSEN SCHOOL OPTION
	Total annual expenses in year 0	$67,000	(50000+4000+6000+5000)+moving expense 2000
	Annaul Salary in 2	$85,000
	After tax salary in Year2	$63,750	(85000*(1-0.25)
	After tax salary in Year3	$66,300	(63150*1.04)
	After tax salary in year(N+1)=1.04*After tax Salary in Year(N)
	Signing Bonus in Year1	$10,000
	Present Value of Cash Flow=(Cash Flow)/((1+i)^N)
	i=discount rate =7.1%=0.071
	N=Year of Cash Flow
1	If her iage is lower, the net benefit will be higher
2	Best Option: MBA from JENSEN SCHOOL(Boyden College)
	Total Value of Current Job	$972,895
	Total Value of Arrington MBA	$1,040,022
	Total Value of Boyden MBA	$1,043,239
	N	Continue Current Job		MASON COLLEGE OPTION		JENSEN SCHOOL OPTION
		CF1	PV1=CF1/(1.071^N)	CF2	PV2=CF2/(1.065^N)	CF3	PV3=CF3/(1.065^N)
	Year	Cash Flow	Present Value	Cash Flow	Present Value	Cash Flow	Present Value
	0			($76,000)	($76,000)	($67,000)	($67,000)
	1	$54,600	$50,980	($74,000)	($69,094)	$10,000	$9,337
	2	$56,511	$49,267	$20,000	$17,436	$63,750	$55,578	Continue Current Job MASON COLLEGE OPTION JENSEN SCHOOL OPTION PV3=CF3/ (1.065 N) PV1 CF1/(1.071 N) PV2=CF2/(1.065 N) CF1 CF2 CF3 Cash Flow Present Value Cash Flow Present Value Cash Flow Present Value Year ($67,000) $9,337 $55,578 $53,969 ($76,000) ($74,000) $20,000 $70,000 $73,150 $76,442 $79,882 $83,476 ($76,000) ($67,000) ($69,094) $17,436 $56,981 $55,598 $54,248 $52,931 $51,646 $50,392 $49,169 0 $54,600 $56,511 $58,489 $60,536 $62,655 $64,848 $67,117 $69,466 $71,898 $50,980 $49,267 $47,611 $10,000 1 $63,750 $66,300 $68,952 $71,710 2 3 $46,010 $44,464 $42,969 $41,525 $52,407 $50,890 $49,417 $47,987 5 $74,578 $77,562 6 7 $40,129 $38,780 $37,477 $36,217 $87,233 $91,158 $80,664 $83,891 $46,598 $45,249 $74,414 $77,019 $95,260 $99,547 $104,027 $108,708 $113,600 $118,712 $124,054 $129,636 $135,470 $141,566 $147,936 $47,975 $46,811 $45,674 $44,565 $43,484 $42,428 $41,398 $40,393 $87,246 $90,736 $94,366 $98,140 $43,939 $42,667 10 11 $79,714 $82,504 $35,000 $33,823 $41,432 $40,233 12 13 $85,392 $88,381 $91,474 $94,676 $32,686 $31,588 $30,526 $29,500 $102,066 $106,148 $110,394 $39,069 $37,938 $36,840 $35,773 14 15 16 $114,810 $119,403 $124,179 $129,146 17 $97,989 $101,419 $28,508 $27,550 $26,624 $39,412 $38,456 $37,522 $34,738 $33,732 $32,756 18 19 $104,969 20 $101,419 $104,969 $27,550 $141,566 $147,936 $38,456 $37,522 $124,179 $129,146 $33,732 $32,756 19 $26,624 20 $108,642 $112,445 $116,381 $120,454 $124,670 $129,033 $25,729 $24,864 $154,594 $161,550 $168,820 $176,417 $36,611 $35,722 $34,855 $34,009 $33,183 $32,378 $31,592 $30,825 $30,076 $29,346 $1,040,022 $134,312 $139,684 $31,808 $30,887 21 22 $24,028 $23,221 $22,440 $21,686 $20,957 $20,252 $19,572 $145,271 $151,082 $157,126 $163,411 $169,947 $176,745 $183,815 $191,167 $29,993 $29,125 $28,282 $27,463 $26,668 $25,897 $25,147 $24,419 $1,043,239 23 24 $184,356 $192,652 $201,321 $210,380 $219,848 $229,741 25 26 $133,549 $138,224 $143,061 $148,069 27 28 29 $18,914 $972,895 SUM 30 SUM $972,895 Present Worth of MASON MBA $1,040,022 Present Worth of JENSEN MBA $1,043,239 Present Worth of Current Job JENSEN MBA should be selected