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 hi 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 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 saving 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 $2,000 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 a 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 the 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 $4,200. 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 29 percent.

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 5.5 percent.

5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?

6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

Answer 1

​​​​​​Answer:

1) I do not think so that it will affect doing an MBA decision.

2) The MBA degree will open door for other opportunities in the future. Currently the Ben is working at EAST COAST, and it is expected that he will work for next 40 years, but if something happen to company and it is closed or downsizing is done,the MBA can save the job or provide other opportunity.

3)

AT current

PV = 53000*.74 * 1.03/.035 = 1088857

After Wilton

0 -70500 1 -70500

1 -70500 0.938967136 -66197.1831

2 10350 0.881659283 9125.173577

3 62100 0.827849092 51409.4286

3 2583360 0.827849092 2138632.23

2062469.649 PV

After Mount Perry

0 -8500 1 -8500

1 -83520 0.938967136 -78422.53521

2 55380 0.881659 48826.27542

2 1910610 0.881659283 1684507.042

1646410.782 PV

The Wilton option is the best.

4)

It can not be solved by using future value as the salary will be received is already a future value therefore the present value concept is appropriate

5)

The PV at present = 1088857

X * .69*1.04/.025 = 1088857

37934 is the amount which will make it indifferent of two options.

6)

It will increase the cash outflow by 5.4% on borrowed money thus reducing the present value of both options.