Question
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
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.
Bens annual salary at East Coast Yachts is $57,000 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 $63,000, 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 $105,000 per year, with an $18,000 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 $75,000 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 $15,000 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 6.1 percent. Assume all salaries are paid at the end of each year."
1. How does Bens age affect his decision to get an MBA?
2. Assuming all salaries are paid at the end of each year, what is the best option for Benfrom a strictly financial standpoint? He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. In order to determine the best option, you will need to calculate the after tax value of each option (perform analysis below).
Remain at Current Job Which option should he choose? _______
After-tax salary ______
Discount rate: ______
Growth rate _____
# of periods _____
PVof remaining at current job _____
Wilton MBA
Direct Costs = _______
Present Value of Direct Costs = _______
Plus "gain" from getting an MBA
Aftertax bonus_______
PV of after-tax bonus_______
After tax salary_______
PV of new salary*________
Note here the assumptions used for PV of new Salary:
*1st calculate the PV of new salary to be received 3 years from now (which is FV of PV of new salary today)
Discount rate ______
Growth rate ______
Number of periods ______
PV of salary in 3 yrs ______
Total Value of a Wilton MBA = ____
Mount Perry MBA
Direct Costs =__________
Present Value of Direct Costs =________
Plus "gain" from getting an MBA
Aftertax bonus_______
PV of after-tax bonus_________
After tax salary ______
PV of new salary_______
Note here the assumptions used for PV of new Salary:
*1st calculate the PV of new salary to be received 2 years from now (which is FV of PV of new salary today)
Total Value of a Wilton MBA = _______
3. 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?
4. 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?
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.
PV of Current Job =___________
PV of Costs to attend Wilton = ______________
PV of bonus = __________
Equal to PV of salary required_________
Calculate the required salary 2 years from now, when he graduates: ______
Calculate the first salary payment (hint: use formula shown above)
After tax salary _______
Pretax salary _______
Salary Wilton MBA Mount Perry MBA
Timeline Timeline Timeline
Year Value Year Value Year Value
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