Peter Roy graduated from university 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 Yale University or the University of Yukon. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allow its students to work while enrolled in the MBA program.

Peter currently works in the money management firm of Paul and Sid. His annual salary at the firm is $53,000 and his salary is expected to increase at 3% per year until retirement. He is currently 28 years old and expect to work for 38 years more. His current job includes a fully paid health insurance plan, and his current average tax rate is 26%. Peter has a savings account with enough money to cover the entire cost of the MBA program.

The Classic School of Business of Yale University is one of the top MBA programs in the country. The MBA degree requires two years of full time enrollment in the University. The annual tuition is $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost another $2,000 per year. Peter expects that after graduation from Yale, he will receive a job offer of about $87,000 per year with a $10,000 signing bonus. The salary at this job will increase at 4% per year. Because of the higher salary , his average income tax will increase to 31%.

The Plush School of Business at University of Yukon began its MBA program 16 years ago. The Plush School is smaller and less well known than the Classic School. It offers an accelerated one year program with a tuition fees of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,200. Peter thinks that he will receive an offer of $78,000 per year upon graduation with an $8,000 signing bonus. The salary at this job will increase at 3.5% per year. His average tax rate at this level of income will be 29%.

Both the school offers an extended health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Peter also estimates that room and board expenses will decrease by $4,000 per year at both schools. The appropriate discount rate is 6.5%.

Questions:

How does Peter s age affect his decision to get an MBA?

What other, perhaps non quantifiable, factors affect Peters decision to get an MBA?

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

Peter believes that an appropriate analysis is to calculate the future value of each options. How would you evaluate this statement?

What initial salary would Peter need to receive to make him indifferent between attending Yale University and staying in his current position?

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