Rai Danielson 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 Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.

Raj currently works at the money management firm of Prash 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 expects to work for 38 more years. His current job includes a fully paid extended health insurance plan, and his current average tax rate is 26%. Raj has a savings account with enough money to cover the entire cost of his MBA program.

The Sentinel School of Business at Assiniboine 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 $2,000 per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for 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 rate will increase to 31%.

The Pond School of Business at the University of Passy began its MBA program 16 years ago. The Pond School is smaller and less well known than the Sentinel School. It 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 $4,200. Raj 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 schools offer an extended health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Raj 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:

1. Raj believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
2. What initial salary would Raj need to receive to make him indifferent between attending Assiniboine University and staying in his current position?
3. Suppose, instead of being able to pay cash for his MBA, Raj must borrow the money. The current borrowing rate is 5.4%. How would this affect his decision?