The MBA Decision

Ben Bates 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 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 will allow its students to work while enrolled in its MBA program.

Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $$61,000$

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 $38$ more years. His current job includes a fully paid health insurance plan, and his current average

tax rate is $26$ percent. 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 $$62,000,$ payable at the

beginning of each school year. Books and other supplies are estimated to cost $$2,000$ per year. Ben expects that after

graduation from Wilton, he will receive a job offer for $$73,000$ per year, with a $$10,000$ signing bonus. 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 $31$

percent.

The Bradley School of Business at Mount Perry College began its MBA program $16$ years 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 $$84,000$ to be paid upon matriculation. Books and other supplies for the program are expected to cost $$4,200.$

Ben thinks that he will receive an offer of $$88,000$ per year upon graduation, with an $$8,000$ signing bonus. The

salary at this job will increase at $3\mathrm{.}5$ percent per year. His average tax rate at this level of income will be $29$ percent.

Both schools offer a health insurance plan that will cost $$3,000$ per year, payable at the beginning of the year. Ben

has also found that both schools offer graduate housing. His room and board expenses will decrease by $$4,000$ per

year at either school he attends. The appropriate discount rate is $5\mathrm{.}5$ percent.

QUESTIONS

QUESTIONS

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

What other, perhaps nonquantifiable, factors affect Ben's

decision to get an MBA?

Assuming all salaries are paid at the end of each year, what

is the best option for Ben from a strictly financial

standpoint?

Ben believes that the appropriate analysis is to calculate the

future value of each option. How would you evaluate this

statement?

What initial salary would Ben need to receive to make him

indifferent between attending Wilton University and staying

in his current position?

Suppose, instead of being able to pay cash for his MBA, Ben

must borrow the money. The current borrowing rate is $5\mathrm{.}4$

percent. How would this affect his decision?