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 Coast Yachts. 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’s annual salary at East Coast Yachts is $61,000 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 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 25 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 $65,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,800 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $107,000 per year, with an $20,000 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 30 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 $78,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,000. Ben thinks that after graduation from Mount Perry, he will receive an offer of $90,000 per year, with a $17,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average income tax rate at this level of income will be 28 percent. Both schools offer a health insurance plan that will cost $3,500 per year, payable at the beginning of the year. Ben 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 6.2 percent. Assume all salaries are paid at the end of each year. Assuming all salaries are paid at the end of each year, what is the best option for Ben—from a strictly financial standpoint? He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. In order to determine the best option, you will need to calculate the after tax value of each option (perform analysis below).

Timeline for growing annuity for 40 years Salary Wilton MBA Mount Perry MBA

Timeline Timeline Timeline

Year Value Year Value Year Value

Answer 1

To choose among the options, we will need to find out the present value of all incomes less expenses at time 0 ( Ben's age = 28).

Remains at his current job:

Yearly payment = 61000

Growth rate = 3%

Time in hand = 40 yrs

Tax rate = 25%

PV =

= $1,009,203.54

Wilton MBA:

Yearly payment = 107000

Growth rate = 4%

Time in hand = 38 yrs

Tax rate = 30%

Signing bonus = 20000

Annual Expenses = 67800

PV =

= $1,867,826.69/1.062^2 - 67800 - 67800/1.062 + 20000/1.062^2

= 16,56,103.7608 -67800 - 63841.81 + 17732.95

= 1,542,194.90

Mount Perry MbA:

Yearly payment = 90000

Growth rate =3.5%

Time in hand = 39 yrs

Tax rate = 28%

Signing bonus = 17000

Annual Expenses = 82000

PV =

= 1,520,919.33/1.062 - 82000 + 17000/1.062 = 1,366,134.96