Question

David Jetter 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 his goal. After examining schools, he has narrowed his choice to either UCSD San Diego or Palomar 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.

David currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $60,000 per year, and his salary expected to increase at 4 % per year until retirement. He is currently 25 years old and expects to work for 45 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 30 %. David has savings account with enough money to cover the entire cost of his MBA program.

UCSD 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 $75,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $4000 per year. David expects that after graduation from UC, he will receive a job offer for about $120,000 per year, with a $25,000 signing bonus. The salary at this job will increase at 5 % per year. Because of the higher salary, his average income tax rate will increase to 35 %. Palomar College is smaller and less well known than UCSD. Palomar offers an accelerated, one – year program, with a tuition cost of $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $5,500. David thinks that he will receive an offer of $95,000 per year upon the graduation, with an $19,000 signing bonus. The salary at this job will increase at 3.5 % per year. His average tax rate at this level of income will be 29 %. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. David also estimates that room and board expenses will cost $2,500 more per year at both schools than his current expenses, payable at the beginning of each year. The appropriate discount rate is 7 percent.

1. How does David’s age affect his decision to get an MBA? Explain why?

2. What other, perhaps non- quantifiable factors affect David’s decision to get an MBA? Explain in detail.

3. Assuming all salaries are paid at the end of each year, what is the best option for David – from a strictly financial standpoint? Explain why in detail with calculations.  

4. David believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement? So what is the future value of each option?  

5. What initial salary would David need to receive to make him indifferent between attending UCSD University and staying in his current position? Explain in detail with calculations.

Answer 1

1. David's remaining age will decide his future earnings as if he will pursue MBA and his number of working years will reduce. However if we calculate the present value of his future incomes for his remaining working year a conclusive decision can be reached. (Refer Attachment 1 to 5)

2. Davis's dream is of becoming an Investment banker which can be achieved only after completing his MBA. This reason is enough for pursuing MBA.

3. As per the table below (Refer Attachment 1 to 5) = UCSD will be the best option for David for pursuing MBA strictly from a financial standpoint.

4. Refer attached file (1 to 5)
Year ol112131415161 26 27 28 29 30 Age- 32 33 34 UCSD 0 0 $ 126,000.00 $ 132,300.00 $ 138,915.00 $ 145,860.75 $ 153,153.79 $ 160,811.48 $ 168,852.05 $ 177,294.65 $ $ $ Income Signing Bonus Income Tax - 35% Net salary L Annuity Net earning 120,000.00 25,000.00 50,750.00 94,250.00 141,622.50 92,054.63 S $ $ $ $ 44,100.00 81,900.00 126,000.00 81,900.00 $ $ $ $ 46,305.00 $ 85,995.00 $ 132,300.00 $ 85,995.00 $ 48,620.25 90,294.75 138,915.00 90,294.75 $ $ $ $ 51,051.26 94,809.49 145,860.75 94,809.49 $ $ $ $ 53,603.83 99,549.96 153,153.79 99,549.96 $ $ $ $ 56,284.02 104,527.46 160,811.48 104,527.46 $ $ $ $ 59,098.22 $ 109,753.83 $ 168,852.05 $ 109,753.83 $ 62,053.13 115,241.52 177,294.65 115,241.52 S $ $ 98,325,000 $ 101,766,375 $ 105,328,198 $ 109,014.685 S 112.830,199 $ 116.779.256 $ 120.866.530 $ 125.096.859 $ 129,475.249 Palomar Income Signing Bonus Income Tax -29% Net salary Annuity Net eaming $ S $ S $ $ 95,000.00 19.000.00 33,060.00 80,940.00 112,670.00 79,995.70 $ $ $ $ 28,514.25 69,810.75 98,325.00 69,810.75 $ $ $ $ 29,512.25 $ 72,254.13 $ 101,766.38 $ 72,254.13 $ 30,545.18 74,783.02 105,328.20 74,783.02 $ $ $ $ 31,614.26 $ 77,400.43 $ 109,014.69 $ 77,400.43 $ 32,720.76 $ 80,109.44 $ 112,830.20 $ 80,109.44 $ 33,865.98 82,913.27 116,779.26 82,913.27 $ $ $ $ 35,051.29 $ 85,815.24 $ 120,866.53 $ 85,815.24 $ 36,278.09 $ 88,818.77 $ 125,096.86 $ 88,818.77 $ 37,547.82 91,927.43 129,475.25 91 927.43 60000 62400 6 4896 6 7491.84 20101 5136729991741475919 1411178955.90675 82114.1430285898.70875) 88814.6571 Current Income Signing Bonus Income Tax - 30% Net salary Cost Net earning with Annuity 18000 42000 187201 436801 43 19468.8 4 5427.20 20247.552 47244.288 2 1057.45408 49134.05952 21899.75224 51099.42190 2 2775.74233 5 3143.39878 23686.772031 55269.13473 24634.24291 57479.90012 25619.61262 5 9779.09612 26644.39713 62170.25997 $ 42,000.00 $ 40,622.40 $ 39,289.99 $ 38,001.27 $ 36,754.83 5 35,549.27 $ 34,383.26 $ 33,255.49 $ 32,164.71 $ 31,109.70 $ 30,089.31

11 12 13 14 36137138139 15 40 16 41 17 42 19 44 20 45 21 46 43 $ 186,159.39 $ 195,467.36 $ 205,240.72 S 215,502.76 $ 226,277.90 $ 237,591.79 $ 249,471.38 $ 261,944.95$ 275,042.20 $ 288,794.31 $ 303,234.02 $ 318,395.72 $ $ $ $ 65,155.79 121,003.60 186,159.39 121,003.50 $ $ $ $ 68,413.57S 127,053.78 195,467.36 127,053.78 $ $ $ 7 1,834.25 133,406.47 $ 205,240.72 S 133,406.47 $ 75,425.97 $ 140,076.79 $ 215,502.76 $ 140,076.79 $ 79,197.26 $ 147,080.63 $ 226,277.90S 147,080.63 $ 83,157.135 154,434.66 $ 237,591.79 $ 154,434.66 $ 87,314.98 $ 162,156.40 $ 249,471.38 $ 162,156.40 $ 91,680.73S 170,264.22 $ 261,914.95 $ 170,264.22 $ 96,264.77S 178,777.43 $ 275,042.20 $ 178,777.43 $ 101,078.01 $ 187,716.30 S 288,794.31 $ 187,716.30 $ 106, 131.91 S 197,102.12 $ 303,234.02 $ 197,102.125 111,438.50 206,957.22 318,395.72 205,957.22 S 134.006.8.92 $ 138.697.123 $ 143.551.522 S 148.575.826 $ 153.775.980 $ 159.158.139 S 164,728,674 $ 170,494,177 $ 176,461,474 S 182,637.625 $ 189,029.942 $ 195,645.990 $ $ $ $ $ $ 38,862.00 95,144.89 134,006.88 95,144.89 $ $ $ $ 40,222.17 98,474.96 138,697.12 98,474.96 $ $ $ $ 41,629.94S 101,921.58 S 143,551.52 $ 101,921.58 $ 43,086.99 105,488.84 148,575.83 105,488.84 $ $ $ $ 44,595.03 109,180.95 153,775.98S 109,180.95 46,155.86 113,002.28 159,158.14 113,002.28 $ $ $ $ 47,771.32 $ 116,957.36 $ 164,728.67$ 116,957.36 $ 49,443.31 $ 121,050.87 170,494.18 $ 121,050.875 51,173.83 $ 125,287.65S 176,461.47 $ 125,287.65 $ 52,964.91 $ 129,672.71 $ 182,637.63 $ 129,672.71 $ 54,818.68 $ 134,211.26 $ 189,029.94 $ 134,211.265 56,737.34 138,908.65 195,645.99 138,908.65 $ 92367.243391 96061.933111 99904.41044 103909.59691 108056.6103 1 12378.87471 116874,02971121548.9909 126410,950G 1 31467.38.86 136726.0841 142195,1275 27710.17301 64657.070371 28818.579931 67243.35318 2 9971.32313 69933.08731 31170.17606 72730.4108 32416.9831 75639.627231 33713.66242 78665.21232 3 5062.20892 8 1811.82081 3 6464.69728 85084.29365 37923.28517 88487.66539 39440.21657 9 2027.17201 41017.82524 9 5708.25889 42658.53825 99536.58924 $ 29,102.38 $ 28,147.82 $ 27,224.575 26,331.50 S 25,457.93 $ 24,632.585 23,824.63 $ 23,043.18 $ 22,287.375 21,556.34 $ 20,849.29 $ 20,165.44

23 48 24 49 25 50 26 51 27 521 28 5 31 29 30 31 32 331 541551561571581 $ 334,315.51 $ 351,031.29 $ 369,582.85 $ 387,011.99 $ 406,362.59 $ 426,680.72 $ 448,014.76 $ 470,415.50 $ 493,936.27 $ 518,633.09 $ 544,564.74 $ 571,792.98 $ $ $ $ 117,010.43 $ 217,305.08 $ 334,315.51 $ 217,305.08 $ 122,860.95 $ 228,170.34 $ 351,031.29 $ 228,170.34 $ 129,004,00 239,578.85 368,582.85 239,578.85 $ S S $ 135,454.20 251,557.80 387.011.99 251,557.80 $ S $ $ 142,226.91 $ 264,135.69 $ 406,362.59 $ 264,135.69 $ 149,338.25 $ 277,342.475 426,680.72 $ 277,342.47 $ 156,805.17 $ 291,209.59 $ 448,014.76 $ 291,209.59 $ 164,645.42 $ 305,770.07S 470,415.50 $ 305,770.07 $ 172,877.70 321,058.58 493,936.27 321,058.58 $ S $ $ 181,521.58 $ 337,111.51 $ 518,633.09 $ 337,111.51 $ 190,597.66 $ 353,967.08 S 544,564.74 $ 353,957.08$ 200,127.54 371,665.43 571,792.98 371,665.43 S 202.493.600 $ 209.580.876 $ 216.916.20GS 224.508,274 $ 232.366,063 S 240.498.875 S 240,916,336 $ 257,628,40R $ 266,645,402 $ 275,977.991 $ 285,637.221 $ 295,634.523 $ $ $ $ 58,723.14 $ 143,770.46 $ 202,493.60 $ 143,770.45 $ 60,778.45 S 148,802.42 $ 209,580.88 $ 148,802.42 $ 62,905.70 S 154,010.51 $ 216,916.21 $ 154,010.51 $ 65,107.40S 159,400.87S 224,508.27 $ 159,400.87 $ 67,386.16 S 164,979.90S 232,366.06 $ 164,979.90 $ 69,744.675 170,754.20 $ 240,498.88 $ 170,754.20 $ 72,185.74 $ 176,730.60 $ 248,916.34 $ 176,730.50 $ 74,712.245 182,916.17 $ 257,628.41 $ 182,916.175 7 7,327.17 S 189,318.24 $ 256,645.40 $ 189,318.24 $ 80,033.62 $ 195,944.37 S 275,977.99 $ 195,944.37 $ 82,834.79 $ 202,802.43 $ 285,637.225 202,802.43 $ 85,734.01 209,900.51 295,634.52 209,900.51 147882.9926 1 53799,2499 159950.1799 166349.18711173002.1146 1 79922.19921187119,08711194602,8506 202388,0046 2 10483.5248 218902.8658 227658.9804 44364.87978 103518.0528 46139.47497 4 7985.05397 107658.77491111965.12591 49904.45613 1 16443.731 5 1900.634371 121101.4802 53976.65975 125945.5394 56135.72614 1 30983.361 58381.15518 136222.6954 60716.40139| 141671.6032 63145.05744 147338.4674| 65670.85974 68297.69413 153232.00611 159361.2863 $ 19,504.01 $ 18,864.28 S 18,245.53 $ 17,647.00 $ 17,058.25 $ 16,508.41 5 15,966.94 $ 15,443.22 $ 14,936.685 14,446.76 $ 13,972.915 13,514.60

35 36 37 38 39140141142 43 44 601611621631641651661671681691 45 $ 600,382.63 $ 630,401.76 $ 661,921.84 | $ 695,017.94 $ 729,768.83 $ 766,257.27 $ 804,570.14 $ 844,798.65 $ 887,038.58 $ 931,390.51 $ 977,960.03 $ $ $ 210,133.92 $ 390,248.71 $ 600,382.63 $ 390,248.71 $ 220,640.61 $ 409,761.14 $ 630,401.76 $ 409,761.14 $ 231,672.65 5 430,249.20 S 661,921.84S 430,249.20 $ 243,256.28 451,761.66 695,017.94 451,761.65 $ $ $ $ 255,419.09 | $ 474,349.74 $ 729,768.835 474,349.74 $ 268,190.05 498,067.23 766,257.27 498,067.23 S $ $ $ 281,599.55$ 522,970.59 $ 804,570.14 $ 522,970.59 $ 295,679.53 $ 549,119.12 $ 844,798.65 S 549,119.12 $ 310,463.50 $ 576,575.08 S 887,038.58S 576,575.08 $ 325,986.68 $ 605,403.83 $ 931,390.51 $ 605,403.83 $ 342,286.01 635,674.02 977,960.03 635,674.02 S 305.981.732 $ 316.691.092 $ 327.775.281 S 339.247.415 $ 351.121,075 $ 363.410,313 / S 376,129.674 $ 389,294,212 $ 402,919,510 $ 417,021.692 $ 431,617,452 $ $ $ $ 88,734.70 217,247.03 305,981.73 217,247.03 $ $ $ $ 91,840.42 $ 224,850.68 $ 316,691.09 S 224,850.68 $ 95,054.83 232,720.45 327,775.28 232,720.45 $ S $ $ 98,381.75 240,865.66 339,247.42 240,865.55 $ $ $ $ 101,825.11 249,295.96 351,121.07 249,295.96 $ $ $ $ 105,388.99 $ 258,021.32 $ 363,410.31 $ 258,021.32 $ 109,077.61 $ 267,052.07 $ 376,129.67$ 267,052.07 $ 112,895.32 $ 276,398.89 $ 389,294.21 $ 276,398.89 $ 116,846.66 $ 286,072.85 S 402,919.51 $ 286,072.85 $ 120,936.29 $ 296,085.40 $ 417,021.59 $ 296,085.40 $ 125,169.06 306,448.39 431,617.45 306,448.39 236765.3397 246225.9532 256085.39141 266328.907 276991.9593 288061.23771 299583.69721311567.03471 324029.71611336990.90471 350470.5409 71029.6019 165735.73781 7 3870.78597176825.61741 172365.1673 179259.774 79898.64211 186430.1649 83094.587791 193887.3715 86418.3713 201642.8664 8 9875. 10615 2 09708.581 93470.1104 218096.9243 9 7208.91482 226820.8012 101097.2714 2 35893.6333 105141.1623 245329.3786 $ 13,071.32 $ 12,642.58 $ 12,227.905 11,826.83 $ 11,438.91 $ 11,063.71 $ 10,700.82 $ 10,349.835 10,010.36 $ 9,682.02 $ 9,364.45

Total earnings at the end of 70 years - 11,803,209.06 7,147,519.54 7,612,234.06 2,283,670.22 5,328,563.81 1,004,350.75
for future value of each option.

Annuity is calculated as ; P*(1/1+r)^n, where in P is the earning per year, r being the discounted rate of 7% and n is the number of year.