Question

THE MBA DECISION
Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East CoastYachts. 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 getclass credit for the internship, no salary can be paid. Other than internships, neither schools will allow its students to work while enrolled in its MBAprogram.
Ben’s annual salary at East Coast Yachts is $50,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 yearsold and expects to work for 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 per- cent. Ben has asavings 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 theuniversity. The annual tuition is $65,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Ben expectsthat after graduation from Wilton, he will receive a job offer for about $90,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4percent 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 sup- plies for the program are expectedto cost $3,500. Ben thinks that after graduation from Mount Perry, he will receive an offer of $78,000 per year, with a $12,000 signing bonus. The salary at this jobwill increase at 3.5 percent per year. His average income tax rate at this level of income will be 29 percent.
Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses willcost $2,000 more per year at both schools than his current expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent. Assume allsalaries are paid at the end of each year.
1. How does Ben’s age affect his decision to get an MBA?
Ben’s age is relevant to the decision based upon how many years he expects to continue working before retirement.
2. What other, perhaps non-quantifiable factors, affect Ben’s decision to get an MBA?
Non-quantifiable factors would include how much Ben enjoys working his current job and industry as opposed to how much he would enjoy his job and industry afterobtaining his MBA.
Another factor that cannot be quantified is that the equation is based upon the assumption that if Ben does not obtain his MBA and stays with his current company, thathe would never advance to a position that would represent a higher jump in pay than the estimated 3%.
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben—from a strictly financial standpoint?




4. In choosing between the two schools, Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate thisstatement?


5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position? Assume his tax rateafter graduating from Wilton University will be 31 percent regardless of his income level.


6. Suppose that 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 decisionto get an MBA?

Answer 1

1) I do not think so that it will affect doing an MBA decision.

2) The MBA degree will open door for other opportunities in the future. Currently the Ben is working at EAST COAST, and it is expected that he willwork for next 40 years, but if something happen to company and it is closed or downsizing is done,the MBA can save the job or provide otheropportunity.

3)

AT current
PV = 50000*.74 * 1.03/.035 = 1088857

After Wilton
0 -70500 1 -70500
1 -70500 0.938967136 -66197.1831
2 10350 0.881659283 9125.173577
3 62100 0.827849092 51409.4286
3 2583360 0.827849092 2138632.23
2062469.649 PV

After Mount Perry
0 -8500 1 -8500
1 -83520 0.938967136 -78422.53521
2 55380 0.881659 48826.27542
2 1910610 0.881659283 1684507.042
1646410.782 PV


The Wilton option is the best.

4)

It can not be solved by using future value as the salary will be received is already a future value therefore the present value concept is appropriate

5)

The PV at present =		1088857
X * .69*1.04/.025 =		1088857
		37934	is the amount which will make it indifferent of two options.

6)

It will increase the cash outflow by 5.4% on borrowed money thus reducing the present value of both options.