Ben Bates graduated from college six years ago with a finance undergrad degree.

Question

Ben Bates graduated from college six years ago with a finance undergrad 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 or Mount Perry.  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 Dewey and Lewis and makes $53,000 per year, and his salary is expected to increase at 3 percent per year until retirement.  He is 28 years old, and expects to work for 38 more years.  He has fully paid health insurance and his tax rate is 26 percent.  Ben has savings with enough money to pay for his MBA.  Wilton is one of the top MBA programs.  The MBA requires two years of full-time enrollment, annual tuition is $58,000 per year.  Books and supplies are $2,000 per year.  Ben expects that after he graduates, he would make $87,000 per year with a $10,000 signing bonus.,  His salary would increase 4% per year - although his tax rate would then be 31%.  Mount Perry offers an accelerated one-year programm for $75,000.  Books and supplies are $4,200.  Ben thinks he would make $78,000 per year with this degree with an $8,000 signing bonus.  His salary after graduation would increase at 3.5% per year, and tax rate would be 29%.  Both schools offer health insurance for $3000 per year.  Room and board for Ben will decrease by $4000 per year for either school.,  The discount rate is 6.5%.

1) How does Ben's age affect his decision to get an MBA?

2) What other, perhaps noquantifiable 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 to Ben from a strictly financial standpoint?

4) Ben believes that the appropriate analysis is to calculate the future value of each option.  How would you evaluate this statement?

5) What intial salary would Ben need to receive to make him indifferent between attending Wilson and staying at his current job?

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

Thanks for help on answering these questions!!

Explanation / 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.

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