The MBA Decision
Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East Coast Yachts. Although he is satisfied with his cu
ent 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 na
owed his choice to either Wilton University or Mount Pe
y 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’s annual salary at East Coast Yachts is $53,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is cu
ently 28 years old and expects to work for 40 more years. His cu
ent job includes a fully paid health insurance plan, and his cu
ent 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 $2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $100,000 per year, with a $15,000 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 Pe
y 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 $71,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that after graduation from Mount Pe
y, he will receive an offer of $88,000 per year, with a $12,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average income 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 cu
ent expenses, payable at the beginning of each year. The appropriate discount rate is 6.5 percent. Assume all salaries are paid at the end of each year.
1. How does Ben’s age affect his decision to get an MBA?
Ben worked in the finance department at East Coast Yachts and now he is 28 years old and excepts to work for 40 more years. He is really young, at the age of him can take less risk of leaving the job and continuing the studies for the better life.
2. What other, perhaps nonquantifiable factors, affect Ben’s decision to get an MBA?
There are some nonquantifiable factors:
What kind of company will he work for after completing his MBA?
Does he like the working environment or the colleges?
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben—from a strictly financial standpoint?
Continue at East Coast Yachts:
Salary
Years
Growth rate
Tax rate
Salary after tax
Discount rate
PV = C[]
=
The Ritter College of Business at Wilton University.
Salary
Years
Growth rate
Tax rate
Salary after tax
Discount rate
PV = C[]
The value of the future salary is ______.
PV =
=
The present value of salaries is _____.
PV = Fees paid today +
The present value of fees is _____.
Net cash flow = Present value of salaries – Present value of fees
= ?
The Bradley School of Business at Mount Pe
y College
Salary
Years
Growth rate
Tax rate
Salary after tax
Discount rate
PV = C[]
The value of the future salary is _______.
PV =
=
= ?
The present value of salaries is _____.
PV =
=
The present value of fees is $____.
Net cash flow = Present value of salaries – Present value of fees
4. In choosing between the two schools, Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
I think Ben is somewhat co
ect. The result of calculating the future value of each option maybe same as calculating the present value of each option. The result in an option with the highest present value, having the highest future value. Thus, the future value analysis will get the same decision.
5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his cu
ent position? Assume his tax rate after graduating from Wilton University will be 31 percent regardless of his income level.
6. Suppose that instead of being able to pay cash for his MBA, Ben must bo
ow the money. The cu
ent bo
owing rate is 5.4 percent. How would this affect his decision to get an MBA?