Gareth Barry 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 Monash University or Swinburne University. 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. Gareth currently works at the money management firm of VinaCapital. His annual salary at the firm is $46,000 per year, and his salary is expected to increase at 4 percent per year until retirement. He is currently 29 years old and expects to work for 37 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 27 percent.

Gareth has a savings account with enough money to cover the entire cost of his MBA program.Monash Business School at Monash 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 $3,900 per year. Gareth expects that after graduation from Monash, he will receive a job offer for about $89,000 per year, with a $16,000 signing bonus (only paid once). 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 34 percent. The Swinburne Business School at Swinburne University began its MBA program 14 years ago. The Swinburne Business School is smaller and less well known than the Monash Business School. Swinburne Business School offers an accelerated one-year program, with a tuition cost of $64,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $6,500. Gareth thinks that he will receive an offer of $75,000 per year upon graduation, with a $10,000 signing bonus (only paid once). The salary at this job will increase at 3.8 percent per year. His average tax rate at this level of income will be 31 percent.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Gareth also estimates that room and board expenses will cost $20,000 per year at both schools when he will need to move from Brisbane to Melbourne. The appropriate discount rate is 6.8 percent. Assume that yearly tax rates will be constant and equal to the average tax rates.

QUESTIONS

1.How does Gareth's age affect his decision to get an MBA?

2.What other, perhaps nonquantifiable, factors affect Gareth's decision to get an MBA?

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

4.Gareth 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 Gareth need to receive to make him indifferent between attending Monash University and staying in his current position?

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