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 $65,000 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 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 $70,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $110,000 per year, with a $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 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 $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will receive an offer of $92,000 per year upon graduation, with an $18,000 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 also estimates that room and board expenses will cost $2,000 more per year at both schools than his current expenses, payable at the beginning of each year. The appropriate discount rate is 6.3 percent.

Please answer:

current salary______

years until retirement_____

salary increase______

tax rate____

Wilton

tuition per year____

books & supplies____

starting salary____

signing bonus____

salary increase_____

tax rate_____

Mount Perry

tuition per year____

books & supplies____

starting salary____

signing bonus____

salary increase_____

tax rate_____

Both schools

health insurance______

room & board_______

discount rate______

Answer 1

		After-tax annual amounts		Calculations	PVs
Current salary	65000	65000*(1-26%)=	48100
Years until retirement	40
Salary increase	3% p.a.
Tax rate	26%			(48100/(0.063-0.03))*(1-(1.03/1.063)^40)=	1044728	PV(GA)
Wilton
Tuition per year	70000	70000*(1-31%)=	48300	48300*(1-1.063^-2)/0.063*(1.063)=	-93737	P/A due
books & supplies/yr.	3000	3000*(1-31%)=	2070	2070*(1-1.063^-2)/0.063*(1.063)=	-4017	P/A due
starting salary	110000	110000*(1-31%)=	75900	(75900/(0.063-0.04))*(1-(1.04/1.063)^38)=	1862801	PV(GA)
signing bonus	20000	20000*(1-31%)=	13800	13800/1.063^2=	12213	PV of FV
salary increase	4%
tax rate	31%
Duration of the course	2 yrs.
Total PV of the option					1777259
Mount Perry
tuition per year	85000	85000*(1-29%)=	60350		-60350	At t=0
books & supplies	4500	4500*(1-29%)=	3195		-3195	At t=0
starting salary	92000	92000*(1-29%)=	65320	(65320/(0.063-0.035))*(1-(1.035/1.063)^39)=	1509166	PV(GA)
signing bonus	18000	18000*(1-29%)=	12780	12780/1.063	12023	PV of FV
salary increase	3.50%
tax rate	29%
Duration of the course	1 yr.
Total PV of the option					1457643
Common to Both schools(Payable beg. Of yr.)
health insurance	3000
room & board	2000	more than at present
discount rate	6.30%