THE MBA DECISION

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's will allow its students to work while enrolled in its MBA program.

Bens annual salary at East Coast Yachts is $50,000 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%. 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 $65,000, 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 $90,000 per year, with a$15,000 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 Bradley School of Business at Mount Perry College began its MBA program 16years 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 $78,000 per year, with a$12,000 signing bonus. The salary at this job will increase at 3.5% per year. His average income tax rate at this level of income will be 29%. 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 6.5%. Assume all salaries are paid at the end of each year.

Chapter 4 The MBA Decision Complete the cells highlighted in yellow. Input area: 50,000 40 Current salary Years until retirement Salary increase Tax rate 3% 26% Wilton Tuition per year Books & Supplies Starting salary Signing bonus Salary increase Tax rate 65,000 2,500 90,000 15,000 4% 31% Mount Perry Tuition per year Books & Supplies Signing bonus Starting salary Salary increase Tax rate 75,000 3,500 12,000 78,000 3.5% 29% Both schools Health insurance Room & board increase 3,000 2,000 A Discount rate 6.50% Current job Aftertax income Present value of salary Wilton MBA PV of tuition & expenses Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition & expenses PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry Current job PV minus bonus after Wilton costs Value in 2 years Aftertax beginning salary Pretax beginning salary Chapter 4 The MBA Decision Complete the cells highlighted in yellow. Input area: 50,000 40 Current salary Years until retirement Salary increase Tax rate 3% 26% Wilton Tuition per year Books & Supplies Starting salary Signing bonus Salary increase Tax rate 65,000 2,500 90,000 15,000 4% 31% Mount Perry Tuition per year Books & Supplies Signing bonus Starting salary Salary increase Tax rate 75,000 3,500 12,000 78,000 3.5% 29% Both schools Health insurance Room & board increase 3,000 2,000 A Discount rate 6.50% Current job Aftertax income Present value of salary Wilton MBA PV of tuition & expenses Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition & expenses PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry Current job PV minus bonus after Wilton costs Value in 2 years Aftertax beginning salary Pretax beginning salary