Question

Case Information #1 #2 #3 #4 Timeline for Growing Annuity 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.

please show work

The MBA Decision

Answer 1

Tax Rate	22%	30%	25%
Discount Rate	7.10%	7.10%	7.10%
Expected increase in salary	3.50%	4.50%	4%
Salary	70000	100000	85000
Signing Bonus	-	20000	10000
Salary Post Tax and other expenses	Option 1			Option 2			Option 3
	CTC	Post Tax	PV	CTC	Post Tax	PV	CTC	Post Tax	PV
1	70000	54600	54600	-76000	-76000	-76000	-67000	-67000	-67000
2	72450.00	56511	52764.70588	-74000	-74000	-69094.30439	-65000	-65000	-60690.94304
3	74985.75	58488.885	50991.10232	100000	70000	61026.58928	85000	63750	55577.78667
4	77610.25	60535.99598	49277.11569	104500	73150	59545.08478	88400	66300	53969.09256
5	80326.61	62654.75583	47620.74205	109202.5	76441.75	58099.54584	91936	68952	52406.96197
6	83138.04	64847.67229	46020.04484	114116.6125	79881.62875	56689.09935	95613.44	71710.08	50890.0471
7	86047.87	67117.34082	44473.15258	119251.8601	83476.30204	55312.89339	99437.9776	74578.4832	49417.0392
8	89059.55	69466.44775	42978.25669	124618.1938	87232.73564	53970.09673	103415.4967	77561.62253	47986.66739
9	92176.63	71897.77342	41533.60941	130226.0125	91158.20874	52659.8983	107552.1166	80664.08743	46597.69756
10	95402.81	74414.19549	40137.5217	136086.183	95260.32813	51381.50675	111854.2012	83890.65093	45248.93133
11	98741.91	77018.69233	38788.36131	142210.0613	99547.0429	50134.14991	116328.3693	87246.27696	43939.20503
12	102197.88	79714.34656	37484.55084	148609.514	104026.6598	48917.07437	120981.5041	90736.12804	42667.38864
13	105774.81	82504.34869	36224.56594	155296.9422	108707.8595	47729.54502	125820.7642	94365.57316	41432.38486
14	109476.92	85392.0009	35006.93347	162285.3046	113599.7132	46570.84458	130853.5948	98140.19609	40233.12815
15	113308.62	88380.72093	33830.22982	169588.1433	118711.7003	45440.27319	136087.7386	102065.8039	39068.58383
16	117274.42	91474.04616	32693.07924	177219.6097	124053.7268	44337.14798	141531.2481	106148.4361	37937.74713
17	121379.02	94675.63777	31594.15221	185194.4922	129636.1445	43260.80265	147192.498	110394.3735	36839.64241
18	125627.29	97989.2851	30532.1639	193528.2443	135469.771	42210.58709	153080.198	114810.1485	35773.32223
19	130024.24	101418.9101	29505.87268	202237.0153	141565.9107	41185.86695	159203.4059	119402.5544	34737.86659
20	134575.09	104968.5719	28514.07864	211337.681	147936.3767	40186.02331	165571.5421	124178.6566	33732.38212
21	139285.22	108642.4719	27555.62221	220847.8766	154593.5136	39210.45225	172194.4038	129145.8029	32756.00131
22	144160.20	112444.9585	26629.38281	230786.0311	161550.2218	38258.56452	179082.18	134311.635	31807.88176
23	149205.81	116380.532	25734.2775	241171.4025	168819.9817	37329.78517	186245.4672	139684.1004	30887.20544
24	154428.01	120453.8506	24869.25977	252024.1156	176416.8809	36423.55323	193695.2858	145271.4644	29993.17802
25	159832.99	124669.7354	24033.31827	263365.2008	184355.6406	35539.32131	201443.0973	151082.323	29125.02814
26	165427.15	129033.1761	23225.47564	275216.6348	192651.6444	34676.55534	209500.8212	157125.6159	28282.00679
27	171217.10	133549.3373	22444.78738	287601.3834	201320.9684	33834.7342	217880.854	163410.6405	27463.38661
28	177209.70	138223.5641	21690.34075	300543.4457	210380.412	33013.34943	226596.0882	169947.0661	26668.46132
29	183412.04	143061.3889	20961.25366	314067.9007	219847.5305	32211.90491	235659.9317	176744.9488	25896.54507
30	189831.46	148068.5375	20256.67371	328200.9562	229740.6694	31429.91655	245086.329	183814.7467	25146.97187
Current NPV			1041970.631			1105490.862			948791.5981

Basis the information provide Lexy should opt for option 2 i.e. Mason's college for MBA