Ben Bates graduated from college six years ago with a finance undergraduate degr

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 by 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.

***IN EXCEL SHOW

1. How does Ben’s age affect his decision to get an MBA?

b.What other, perhaps non-quantifiable factors affect Ben’s decision to get an MBA?

c. Assuming all salaries are paid at the end of each year, what is the best option for Ben - from a strictly financial standpoint?

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

e. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?

f. Suppose, 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?

Explanation / Answer

Answer A:- Age can be c0nsidered as one of the most vital factors. The younger the person is, the greater time he will be having to recover his expenses of his decision to attain the college for MBA. This decision includes both the explicit cost that is tuition fee and the implicit cost the opportunity cost of earning salary.

Answer B:- Perhaps the main nonquantifiable factors would be if he is committed and when he has any children. Having a partner and children, he might be less likely to gain for an MBA since his family may be less amenable to enough time and money constraints enforced by classes. Other factors would include his determination and wish to follow an MBA, job satisfaction, and exactly how important the prestige of employment is to him, whatever the salary.

Answer C:-.   He has three options: continue to be at his current job, follow a Wilton MBA, or follow a Mt. Perry MBA. On this research, room and mother board costs are unimportant since presumably, they'll be the same whether he attends college or university or retains his current job. We have to find the aftertax value of every, so:

   Stay at current job:

   After tax salary = $55,000(1 - .26) = $40,700

   His salary will expand at 3 percent per season, therefore the present value of his aftertax salary is:

   PV = C 1 - [(1 + g)/(1 + r)]t / (r - g)]   

   PV = $40,700[1 - [(1 +.065)/(1 + .03)]38 / (.065 - .03)

   PV = $836,227.34

   Wilton MBA:

   Costs:

   Total immediate costs = $63,000 + 2,500 + 3,000 = $68,500

   PV of immediate costs = $68,500 + 68,500 / (1.065) = $132,819.25

   PV of indirect costs (lost salary) = $40,700 / (1.065) + $40,700(1 + .03) / (1 + .065)2 = $75,176.00

   Salary:

   PV of aftertax benefit paid in 24 months = $15,000(1 - .31) / 1.0652 = $9,125.17

   Aftertax salary = $98,000(1 - .31) = $67,620

   His salary will increase at 4 percent per 12 months. We must don't forget that he'll now only benefit 36 years, therefore the present value of his aftertax salary is:

   PV = C 1 - [(1 + g)/(1 + r)]t / (r - g)]      

   PV = $67,620[1 - [(1 +.065)/(1 + .04)]36 / (.065 - .04)

   PV = $1,554,663.22

   Because the first salary repayment will be received three years from today, so we have to discount this for just two years to get the value today, which is:

   PV = $1,544,663.22 / 1.0652

   PV = $1,370,683.26

   So, the full total value of the Wilton MBA is:

   Value = -$75,160 - 132,819.25 + 9,125.17 + 1,370,683.26 = $1,171,813.18

   Support Perry MBA:

   Costs:

   Total immediate costs = $78,000 + 3,500 + 3,000 = $86,500. Please note, this is also the PV of the immediate costs being that they are all paid today.

   PV of indirect costs (lost salary) = $40,700 / (1.065) = $38,215.96

   Salary:

   PV of aftertax bonus offer paid in 12 months = $10,000(1 - .29) / 1.065 = $6,666.67

   Aftertax salary = $81,000(1 - .29) = $57,510

   His salary will increase at 3.5 percent per season. We must don't forget that he'll now only improve 37 years, therefore the present value of his aftertax salary is:

   PV = C 1 - [(1 + g)/(1 + r)]t / (r - g)]      

   PV = $57,510[1 - [(1 +.065)/(1 + .035)]37 / (.065 - .035)

   PV = $1,250,991.81

   Because the first salary repayment will be received 2 yrs from today, so we have to discount this for just one year to get the value today, which is:

   PV = $1,250,991.81 / 1.065

   PV = $1,174,640.20

   So, the full total value of your Support Perry MBA is:

   Value = -$86,500 - 38,215.96 + 6,666.67 + 1,174,640.20 = $1,056,590.90

Answer D:- He's somewhat correct. Determining the near future value of every decision will bring about the choice with the best present value getting the highest future value. Thus, another value research will cause the same decision. However, his assertion a future value examination is the right method is incorrect since a present-day value analysis gives the right answer as well.

Answer E:-   To get the salary offer he'd need to help make the Wilton MBA as fiscally attractive as the as the existing job, we have to take the PV of his current job, add the expenses of going to Wilton, and the PV of the extra with an aftertax basis. So, the required PV to help make the Wilton MBA exactly like his current job will be:

   PV = $836,227.34 + 132,819.25 + 75,176.00 - 9,125.17 = $1,035,097.42

   This PV can make his current job exactly add up to the Wilton MBA over a financial basis. Since his salary it's still an ever-growing annuity, the after-tax salary needed is:

   PV = C 1 - [(1 + g)/(1 + r)]t / (r - g)]      

   $1,035,097.42 = C [1 - [(1 +.065)/(1 + .04)]36 / (.065 - .04)

   C = $45,021.51

   This is actually the after tax salary. So, the pretax salary must be:

   Pretax salary = $45,021.51 / (1 - .31) = $65,248.57

Answer F:-    The price (interest) of your choice will depend on the riskiness of the utilization of cash, not the foundation of the money. Therefore, whether he pays money or must acquire is irrelevant. That is an important notion which is mentioned further in capital budgeting and the price tag on capital in later chapters.

Explanation:

He's somewhat correct. Determining the near future value of every decision will bring about the choice with the best present value getting the highest future value.

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