Ben Bates graduated from college six years ago with a finance undergraduate degr
ID: 2658304 • Letter: B
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 solve the calculations (show formulas) listed below, using the above information:
Current job Aftertax income Present value of salary Wilton MBA PV of tuition & expenses Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition & expenses PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry Current job PV minus bonus after Wilton costs Value in 2 vears Aftertax beginning salary Pretax beginning salaryExplanation / Answer
Year 0
Year 1.
Year 2
Year 3
Year 4
Current Job
After tax Income
-
48,100.00
49,543.00
51,029.29
52,560.17
Present value of the salary
1,73,571.61
45,249.29
43,844.57
42,845.18
41,632.58
Willton MBA
Pv of tuition and expenses
1,42,405.68
73,377.23
69,028.44
-
0
Aftertax Bonus
-
-
-
13,800.00
-
PV of Bonus
12,212.72
-
12,212.72
0
After tax salary
-
-
-
75,900.00
78,936.00
PV of salary in 2 years
67,169.98
67,169.98
Value of salary today
1,25,010.93
63,189.07
61821.8585
PV of attending Willton
-5,182.02
-
-
Mount Perry MBA
-
Pv of tuition and expenses
88,899.34
88,899.34
-
-
PV of signing Bonus
16,933.21
16,933.21
After tax salary
-
65,320.00
67,606.20
69,972.42
PV of salary in 1 year
1,16,250.40
61,448.73
Value of salary today
1,09,360.68
57,806.90
56,284.23
54801.6731
PV of attending Mt. Perry
37,394.55
Current job PV minus bonus after willton cost
18,953.21
Value in 2 years
-
Aftertax begining salary
75,900.00
Pretax Begining salary
1,10,000.00
Working Notes:
1. =65000+3%*65000=66950
2. 66950-26%*66950=49543
3. PV of tuition: =(73000/1.06)
4. PV of bonus= 138000/1.063^2
5. PV of salary of 4th year=78936/1.063^4
6. Salary from mt. perry job: 92000-29%*92000
Year 0
Year 1.
Year 2
Year 3
Year 4
Current Job
After tax Income
-
48,100.00
49,543.00
51,029.29
52,560.17
Present value of the salary
1,73,571.61
45,249.29
43,844.57
42,845.18
41,632.58
Willton MBA
Pv of tuition and expenses
1,42,405.68
73,377.23
69,028.44
-
0
Aftertax Bonus
-
-
-
13,800.00
-
PV of Bonus
12,212.72
-
12,212.72
0
After tax salary
-
-
-
75,900.00
78,936.00
PV of salary in 2 years
67,169.98
67,169.98
Value of salary today
1,25,010.93
63,189.07
61821.8585
PV of attending Willton
-5,182.02
-
-
Mount Perry MBA
-
Pv of tuition and expenses
88,899.34
88,899.34
-
-
PV of signing Bonus
16,933.21
16,933.21
After tax salary
-
65,320.00
67,606.20
69,972.42
PV of salary in 1 year
1,16,250.40
61,448.73
Value of salary today
1,09,360.68
57,806.90
56,284.23
54801.6731
PV of attending Mt. Perry
37,394.55
Current job PV minus bonus after willton cost
18,953.21
Value in 2 years
-
Aftertax begining salary
75,900.00
Pretax Begining salary
1,10,000.00
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