Question

John Ross graduated from college 6 years ago with a finance undergraduate degree. Although he is satisfied with his current job, his dream is to become an investment banker. To become an investment banker, he would need to take an MBA degree. He is, thus, looking for colleges. After some time, John has narrowed his choice to Brandeis University, Carlton College, or Northeastern University. Both schools allow and encourage internships. However, the Northeastern University will allow students to work while enrolled in a MBA program.

I will describe below the four alternatives that John Ross can evaluate as of today.

Alternative (1)

He can keep his current job at the management firm D&L. His annual salary at the firm is $65,000 per year and is salary is expected to increase at 3% per year until retirement. He is currently 28 years old and he expects to work for 40 more years. His current job includes a full paid health insurance plan and is current average tax rate is 26%. Ben has a savings account with enough money to cover the entire cost of the MBA program.

Alternative (2)

The MBA program at Brandeis University requires two years of full-time enrollment at the university. The annual tuition is $70,000. Books and other supplies are estimated to cost $3,000 per year. John expects that after graduation from Brandeis University he will receive a job offer of $110,000 per year with a signing bonus of $20,000. The expected salary will increase at 4% per year. Because of the higher salary, the average income tax rate will be 31%.

Alternative (3)

The Carlton College offers a one-year program. The tuition cost is $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. John thinks that after the Carlton degree he will be able to receive an offer of $92,000 per year with a $18,000 signing bonus. The salary at this job will increase at 3.5% per year. His average tax rate at this level of income will be 29%.

Alternative (4)

Northeastern University offers a two-years program. The annual tuition is $90.000. Northeastern allows students to work while enrolled in the MBA program. After some research, John has found out that he can potentially work for his marketing professor as research assistant. The annual stipend for this position at Northeastern University is $25,000 for the first year and $27,000 for the second year. Books and other supplies are estimated to cost $2,000 per year. John expects that after graduation from Northeastern University he will receive a job offer of $85,000 per year with a signing bonus of $10,000. The expected salary will increase at 2% per year for the first 10 years. The growth rate will be 4% thereafter. The average income tax rate is 30%.

All schools offer a health insurance plan that will cost $3,000 per year. John also estimates that room and board expenses will cost $2,000 more per year at all schools than his current expenses. The appropriate discount rate is 6.3%.

Determine the NPV for each of the four alternatives.

Answer 1

Discount rate

6.30%

Year

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

Alternative (1)
Tax rate	26%
Annual increase	3%
Cash flows

Cash flows
Salary	65,000	66,950	68,959
After tax income	48,100	49,543	51,029
PV of after tax net income	48,100	46,607	45,160

NPV

1,373,555

Alternative (2)
Tax rate	31%
Annual increase	4%
Cash flows

College expense	(75,000)	(75,000)	-	-	-	-	-
Salary	-	-	130,000	114,400	118,976	123,735	128,684
After tax income	-	-	89,700	78,936	82,093	85,377	88,792
PV of after tax net income	(75,000)	(70,555)	79,383	65,717	64,295	62,904	61,543

NPV

2,254,134

Alternative (3)
Tax rate	29%
Annual increase	3.5%
Cash flows

College expense	(6,500)	(85,000)	-	-	-	-	-	-
Salary	-	110,000	95,220	98,553	102,002	105,572	109,267	113,091
After tax income	-	17,750	67,606	69,972	72,421	74,956	77,580	80,295
PV of after tax net income	(6,500)	16,698	59,830	58,254	56,720	55,226	53,771	52,355

NPV

1,901,793

Alternative (4)
Tax rate	30%
Annual increase	2%	4%
Cash flows

College expense	(94,000)	(94,000)	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Salary/ Stipend	25,000	27,000	95,000	86,700	88,434	90,203	92,007	93,847	95,724	97,638	99,591	103,575	107,718	112,026	116,507	121,168
After tax income	(48,300)	(46,900)	66,500	60,690	61,904	63,142	64,405	65,693	67,007	68,347	69,714	72,502	75,402	78,418	81,555	84,817
PV of after tax net income	-	-	58,851	50,526	48,482	46,521	44,639	42,834	41,101	39,438	37,843	37,024	36,223	35,439	34,673	33,922

NPV

1,640,232

It appears that 2nd alternative- Brandeis University is most beneficial over the life time

Notes- Assuming no rebates or tax breaks from college tuition fees paid in the next years. No cost of medical insurance is included in any of the option because this benefit is available in all 4 alternatives. Due to space constraint, all cash flows could not included for 68 years.