Question

THE MBA DECISION Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $53,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program. The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is 558,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $87,000 per year, with a $10,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent. The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College, Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,200. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with an 58,000 signing bonus. The salary at this job will increase at 3.5 percent per Pace 194

Question6. suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

Answer 1

The decision that Ben faces is which college should he choose to get his MBA - Ritter College of Business or Bradley school of Business.
Ben has already decided to pursue an MBA and is evaluating which college to join based on the expected financial and non-financial benefits. This decision is not affected by the fact whether he has the cash money for the tuition fees or will have to borrow to pay the tuition fees. This is so because while making financial calculations, we have used a discount rate of 5.5%. The borrowing cost is 5.4% which is less than the discount rate and thus the desirability of the college from a financial point of view will not change by the fact that he has to borrow money to attend college.

There are certain implicit assumptions about the loan which are not mentioned in the above question

1. Ben will be able to secure the loan to cover the entire tuition and other living and academic expenses irrespective of which college he decides to join
2. The repayment terms are such that he will be able to manage the cash outflow to repay interest and principal of the loan after graduation when he starts his new job
3. He will be able to manage his living expenses post-graduation and be able to make the loan repayment installment.