Kim is trying to decide between two full-time admissions offers from prestigious MBA 2-year programs. She is considering an in-state university and a top-tier private university. She had decided that both programs will offer her an excellent education and provide great career prospects after graduation. However, the cost differences are significant, and she really wants to avoid being in major debt after her MBA. Kim wants to base her decision primarily on the quickest payback period for her MBA education.

Table 1 shows the annual costs for the two programs next year.

TABLE 1: MBA Program Costs

Tuition $ 21,500 $ 74,700 Room & Board $ 18,000 $ 36,300

Kim is not sure which career path she wants to pursue, but she also understands that her career options and starting salary will likely depend on her performance in the program. She is confident that she can earn at least a 3.25 GPA with a probability of 60%. She feels there is a 25% probability she could reach 3.50 GPA and only a 15% chance she will earn a 3.75 GPA or higher.

Based on the MBA program websites, the average starting salaries are presented in Table 2. Kim knew from Career Services at these Programs that students who earn a GPA of around 3.50 will see offers at the mean salary number. But if students have a GPA closer to 3.25 then salary offers are around 5% below the mean. And students who earn a 3.75 or higher GPA are likely to see offers as high as 15% above the mean.

Program Costs Per Year

Mid-Tier Program

Top-Tier Program

TABLE 2: Average Starting Salaries Based on Career Path

Career Path

Mid-Tier Program

Top-Tier Program

Consulting

Finance / Accounting Supply Chain / Operations Marketing / Sales

$ 108,909 $ 93,666 $ 94,833 $ 99,979

$ 152,000 $ 174,000 $ 138,000 $ 112,000

Kim also learned from Career Services that students graduating with higher GPAs were more likely to pursue Consulting and Finance careers. Career Services provided her with the information in Table 3 indicating which career paths students are likely to pursue based on the final GPA. Although Kim preferred a career in Marketing, she was intrigued by the other areas especially since starting salaries were much higher for Consulting and Finance offers.

TABLE 3: Percentage of Students Pursuing Different Careers Based on GPA

Career Path

3.75 GPA

3.50 GPA

3.25 GPA

Consulting

Finance / Accounting Supply Chain / Operations Marketing / Sales

35% 28% 10% 30% 26% 35% 20% 23% 35% 15% 22% 20%

Kim wants to use Decision Tree Analysis to help her decide on which MBA program offer she should accept. Answer the following questions and clearly state any assumptions you are making.

Questions:

1. Develop a Decision Tree that maps out the different career paths and starting salaries for the two programs. (25 pts)

2. Determine the EV or expected value salary based on Kims final GPA for the two programs. Comment on the difference in the EV for the 2 programs. (15 pts)

3. If Kims current salary is $65,000 annually, what is her total cost for her MBA for the 2 different program options. Include the loss of income she would incur by going to school full-time. (15 pts)

4. Based on the EV salary calculated in Q2, determine the breakeven point for Kims MBA education for the two programs. Assume that she earns a 5% pay increase per year after graduation. If Kim was using breakeven or payback as the only criteria for deciding which program to join, then which MBA program will she choose? (25 pts)

5. If Kim knew that her final GPA was 3.75, then how would that impact the breakeven point for the two programs? (10 pts)

6. As a Career Consultant, what advice would you give Kim to help her make the optimum decision? What other factors might she consider? (10 pts)

7. EXTRA CREDIT: If Kim received a total scholarship for $50,000 toward the tuition at the top-tier program, how would that impact her payback period calculation in Q4?