Question

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 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 Currently works at the money management firm of Dewey and Louis. His Annual salary at the firm is $53,000 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 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 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 $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $87,000 per year, with a $10,000 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 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 Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4200. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with an $8,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be at 29%.

       Both Schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben has also found that both schools offer graduate housing. His room and board expenses will decrease by $4,000 per year at either school he attends. The appropriate discount rate is 6.5 percent.

Assume that Ben decides to work on the MBA program at Wilton University, what is the present value of direct cost?

	A.	114,399.06
	B.	114,924.17
	C.	114,939.06
	D.	141,399.06

Answer 1

The question asked is just asking for the Present value of direct cost. Hence we can ignore all given informations on present salary, future salaries, increment, bonuses, etc. It is also important to note that all cashflows for tuition expenses, health insurance are paid at the beginning of the year.

Total direct cost incurred for MBA = Tuition Fees + Books and supplies expense +health insurance plan - Saving on room and board expenses = $58000 + $2000 + $3000 - $4000 = $59000

Discount rate = 6.5%

PV of direct cost in Year 1 = $59000 (since it is incurred in the beginning of the year)

PV of direct cost in Year 2 = $59000/ (1+6.5%) = $55399.06

PV of all direct costs for 2 year MBA at Wilton University = $114,399.06.

Hence, the correct answer is option (a)