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 inves\tment banker. He feels that an MBA degree would allow him to achieve his 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 student 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 $70,000 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 37 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 28 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 $2,000 per year. Ben expected that after graduation from Wilton, he will receive a job offer for about $100,000 per year, with a $10,000 signing bonus. The salary at this job will increase at 4% per year. Because of the higher salary, his average income tax rate will increase to 32 percent. The Bradley School of Business at Mount Perry College began its MBA 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated, oneyear program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,000. Ben thinks that he will receive an offer of $85,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will increase at 3.5 percent. His average tax rate at this level of income will be 30 percent. Both schools offer a health insurance plan that will cost $2,500 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $15,000 per year at either school. The appropriate discount rate is 6 percent.

Assuming all salaries are paid at the end of each year, what is the best option for Ben – from a strictly financial standpoint?

Answer 1

Fact of the question

1. DOING 2 YEARS MBA PROGRAM

Ben Bates joint 2 years MBA programs then, he would have been incurred the following Cost:

Annual tution fee paid at beginning of the the each school year $65,000 for 2 years.

Books and other supplier $2,000 per year for 2 years paid at beginning of the each school year.

Health insurance plan paid at beginning of the each school year $2,500 for 2 years.

Estimated room and board expenses $15,000 assumed paid at beginning of the each school year for 2 years.

After completion of his 2 year MBA Programe he will get job of $100,000 P.a. with signing bonus $10,000 P.a.

His salaly would increase in annual compounding 4% and income tax rate will be 32%. Therefore, Ben bates will get net salary and bonus after deducting income tax will be 68% of his salary and bonus.

He expected to work 37 more years, but due to 2 year MBA regular program to will be expected to work 35 year (37-2 year MBA study period).

Appropriate discount rate is 6%. Therefore, Present value factor (PVF)= 1/(1+R)n.

Present value of Ben's future cash flow (Net salary+bonus) discounted at 6% each year for 35 years.

The aggregate of PRESENT VALUE OF FUTURE CASH FLOW = $1,819,859

Less: Present value of Cost of MBA program:

Year 0(Beginning) = 65000+2000+2500+15000 = ( $84,500)

Year 1(Beginning) (65000+2000+2500+15000)/1.06 = ($79,717)

NET PRESENT VALUE    $1,655,642

2. DOING 1 YEARS MBA PROGRAM

Ben Bates joint 1 years MBA programs then, he would have been incurred the following Cost:

Annual tution fee paid at beginning of the the each school year $75,000.

Books and other supplier $2,000 paid at beginning of the school year.

Health insurance plan paid at beginning of the school year $2,500.

Estimated room and board expenses $15,000 assumed paid at beginning of the school year.

After completion of his 1 year MBA Programe he will get job of $75,000 P.a. with signing bonus $10,000 P.a.

His salaly would increase in annual compounding 3.5% and income tax rate will be 30%. Therefore, Ben bates will get net salary and bonus after deducting income tax will be 70% of his salary and bonus.

He expected to work 37 more years, but due to 1 year MBA regular program to will be expected to work 36 year (37-1 year MBA study period).

Appropriate discount rate is 6%. Therefore, Present value factor (PVF)= 1/(1+R)n.

Present value of Ben's future cash flow (Net salary+bonus) discounted at 6% each year for 36 years.

The aggregate of PRESENT VALUE OF FUTURE CASH FLOW = $1,533,521

Less: Present value of Cost of MBA program:

Year 0(Beginning) = 75000+3000+2500+15000 = ( $84,500)

NET PRESENT VALUE    $1,438,021

3. CONTINUE THE PRESENT JOB WITHOUT DOING MBA PROGRAM:

If, Ben bates without doing MBA programms, he will continue his present job for another 37 year then his present value of future cash flow would be $1,132255, with 3% annual increment and average income tax rate is 28%.

BEST OPTION FOR BEN BATES:

Out of above 3 options, Since, option 1 i.e., doing 2 year MBA Program at the Ritter College of Business at Wilton University and then joining job and will work 35 year will give  HIGHEST NET PRESENT VALUE of $1,655,642, it is better for Ben bates.