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.

Salary Wilton MBA Mount Perry MBA Timeline Timeline Timeline Year Value Year Value Year Value

Answer 1

IN CASE OF PRESENT JOB					IN CASE OF WILTON UNIVERSITY				IN CASE OF MOUNT PERRY COLLEGE
Year	Cash inflow (net of tax)	present value factor	present value		Net Salary inflow/(outflow)	present value factor	present value		Net Salary inflow/(outflow)	present value factor	present value
0	45750	1	45750		-67800	1	-67800		-82000	1	-82000
1	47123	0.9416	44371		-67800	0.9416	-63840		77040	0.9416	72541
2	48536	0.8866	43032		88900	0.8866	78819		67068	0.8866	59462
3	49992	0.8349	41739		77896	0.8349	65035		69415	0.8349	57955
4	51492	0.7861	40478		81012	0.7861	63683		71845	0.7861	56477
5	53037	0.7402	39258		84252	0.7402	62364		74359	0.7402	55041
6	54628	0.697	38076		87622	0.697	61073		76962	0.697	53643
7	56267	0.6563	36928		91127	0.6563	59807		79656	0.6563	52278
8	57955	0.618	35816		94772	0.618	58569		82444	0.618	50950
9	59693	0.5819	34736		98563	0.5819	57354		85329	0.5819	49653
10	61484	0.548	33693		102506	0.548	56173		88316	0.548	48397
11	63329	0.516	32678		106606	0.516	55009		91407	0.516	47166
12	65229	0.4859	31695		110870	0.4859	53872		94606	0.4859	45969
13	67185	0.4575	30737		115305	0.4575	52752		97917	0.4575	44797
14	69201	0.4308	29812		119917	0.4308	51660		101344	0.4308	43659
15	71277	0.4056	28910		124714	0.4056	50584		104891	0.4056	42544
16	73415	0.382	28045		129703	0.382	49546		108563	0.382	41471
17	75618	0.3597	27200		134891	0.3597	48520		112362	0.3597	40417
18	77886	0.3387	26380		140286	0.3387	47515		116295	0.3387	39389
19	80223	0.3189	25583		145898	0.3189	46527		120365	0.3189	38384
20	82630	0.3003	24814		151734	0.3003	45566		124578	0.3003	37411
21	85108	0.2827	24060		157803	0.2827	44611		128938	0.2827	36451
22	87662	0.2662	23336		164115	0.2662	43687		133451	0.2662	35525
23	90292	0.2507	22636		170680	0.2507	42789		138122	0.2507	34627
24	93000	0.2361	21957		177507	0.2361	41909		142956	0.2361	33752
25	95790	0.2222	21285		184607	0.2222	41020		147960	0.2222	32877
26	98664	0.2093	20650		191991	0.2093	40184		153138	0.2093	32052
27	101624	0.1971	20030		199671	0.1971	39355		158498	0.1971	31240
28	104673	0.1856	19427		207658	0.1856	38541		164046	0.1856	30447
29	107813	0.1747	18835		215964	0.1747	37729		169787	0.1747	29662
30	111047	0.1645	18267		224603	0.1645	36947		175730	0.1645	28908
31	114379	0.1549	17717		233587	0.1549	36183		181880	0.1549	28173
32	117810	0.1459	17188		242930	0.1459	35444		188246	0.1459	27465
33	121344	0.1374	16673		252648	0.1374	34714		194835	0.1374	26770
34	124985	0.1293	16161		262754	0.1293	33974		201654	0.1293	26074
35	128734	0.1218	15680		273264	0.1218	33284		208712	0.1218	25421
36	132596	0.1147	15209		284194	0.1147	32597		216017	0.1147	24777
37	136574	0.108	14750		295562	0.108	31921		223577	0.108	24146
38	140671	0.1017	14306		307385	0.1017	31261		231402	0.1017	23534
39	144891	0.0958	13881		319680	0.0958	30625		239502	0.0958	22944
40	149238	0.0902	13461		332467	0.0902	29989		247884	0.0902	22359
			1085237				1669551				1472808
					Extra expenses + tax saving on it		3250		Extra expenses + tax saving on it		3200
					of 40 years		47400		of 40 years		46671
					Net cash flow		1622151		Net cash flow		1426137

If wilton university is chosen net benefit would be as compared to present situation =

=1622151-1085237

=536914

If mount perry college is chosen net benefit would be as compared to present situation =

=1426137-1085237

=340900

Hence it is bettre to go for wilton college