Question

Ariel Sunnyvale graduated from university six years ago with an undergraduate degree in finance. Although she is satisfied with her current job, her goal is to become an investment banker. She feels that an MBA degree would allow her to achieve her goal. After examining schools, she has narrowed her choice to either Northern University or Southern University. 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. Ariel currently works at the money management firm of Greyson Partners. Her annual salary at the firm is $64,000 per year, expected to increase at 2.75 percent per year until retirement. She is currently 30 years old and expects to work for 37 more years. Her current job includes a fully paid health insurance plan, and her current average tax rate is 25 percent. Ariel has a savings account with enough money to cover the entire cost of her MBA program. The Faculty of Management at Northern 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 $50,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ariel expects that after graduation from Northern, she will receive a job offer for about $88,000 per year, with a $5,000 signing bonus. The salary at this job will increase at 3 percent per year. Because of the higher salary, her average income tax rate will increase to 27 percent. The School of Business at Southern University began its MBA program 16 years ago and is less well known than Northern University's Faculty of Management. Southern University offers an accelerated, one-year program, with a tuition cost of $80,000 to be paid upon graduation. Books and other supplies for the program are expected to cost $4,500. Ariel thinks that she will receive an offer of $100,000 per year upon graduation, with an $15,000 signing bonus. The salary at this job will increase at 3.5 percent per year. Her average tax rate at this level of income will be 28.5 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ariel also estimates that room and board expenses will cost $2,000 more per year at both schools than her current expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent.

1. What other, perhaps non-quantifiable, factors affect Ariel's decision to get an MBA?

2. Assuming all salaries are paid at the end of each year, which is the best option for Ariel—from a strictly financial standpoint.

3. Suppose, instead of being able to pay cash for her MBA, Ariel must borrow the money. The current borrowing rate is 3.75 percent. How would this affect her decision?

Answer 1

1.

- Relation and goodwill earned in 6 years might get impacted as she has to leave the current organisation
- Earnings would be reduced by two years or 1 year in any case.
- Job offer is 'expected' but not ascertained. Future is not predictable, if there is any situation like Covid-19 then the job market may not remain the same as it is now.
- Willingness to continue the studies - Assuming she worked for 6 years, now whether she should go for MBA (that would stop her source of earnings) or she should look for a job with bigger paycheck. This dilemma could impact her willingness to join MBA. However, her dream is of becoming an Investment banker which can be achieved only after completing her MBA.

2.

FORMULA:

So we can see, joining the SOUTHERN UNIVERSITY would be the most profitable option for her.

-------------------------------------------------------------------

Please upvote if this answers helps !

Also do Let me know in the comments, if i have missed out on any aspect of your question.