THE MBA DECISION Ben Bates graduated from college six years ago with a finance u
ID: 2579837 • Letter: T
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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 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'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 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 $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 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 $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 Perry, 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 current 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? 2. What other, perhaps nonquantifiable factors, affect Ben's decision to get an MBA? 3. Assuming all salaries are paid at the end of each year, what is the best option for Ben—from a strictly financial standpoint? 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? 5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current 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 borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision to get an MBA?
Explanation / Answer
1. Age is clearly a vital factor. The more youthful an individual is, the additional time there is for the (ideally) expanded compensation to balance the cost of the choice to come back to class for a MBA. The cost incorporates both the unequivocal costs, for example, educational cost, and additionally the open door cost of the lost compensation.
2.On account of Ben, a few" non-quantifiable" variables would be; Private and individual factors; Ben's status will influence his choice to take the MBA program or not. In the event that Ben is hitched or has kids, costs will be high, and the time permitted to study will be restricted since he needs to take think about his family. On the off chance that that he has family Ben will be less disposed to return for a MBA. Additionally the budgetary circumstance influences Ben's choice. In the event that that Ben has an advance and he has to pay back this advance the annuity and the loan fee will influence his compensation that will influence his ability to go to the MBA program. Also, he can get a chance of advancement in his present place of employment, so taking the MBA will cost him cash, stop his wage and may lead him to lose the advancement opportunity and different open doors sooner rather than later. The extra expenses of transportation and other will influence likewise the money related limit of Ben.
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