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 $65,000 per year, andhis 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 percent. Benhas 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 $70,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $110,000 per year, with a $20,000 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 yearsago. 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 $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will receive an offer of $92,000 per year upon graduation, with an $18,000 signing bonus. The salary at this job will increase at 3.5 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 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 6.3 percent.

Question 1: Assuming all salaries are paid at the end of each year, what is the best option for Benfrom a strictly financial standpoint?

Question 2: Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?

Given the case above, use Excel spreadsheet to analyze problems

Books Case Title: Input: Current Wilton Mount Perry Annual Salary Expected increase Number of years Tax rate Annual Tuition (BGN) Book Books length Length Bonus Bonus Health insurance Room & Board Salary After Tax Discount Rate Problem 3 *** Assume costs for room and board are the same for all three options. Current Situation Year Year 3 salary bonus Bonus Annual 5 10 12 13 14 1.5 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 salary after tax Annual Tuition Health insurance Room & Board Total Cash Flow PV INPV wilton Year salary after tax bonus Annual Tuition Books Health insurance Room & Board Opp. Cost Total Cash Flow PV NPV Mount Perry Year salary after tax bonus Annual Tuition Books Health insurance Room & Board Opp Cost Total Cash Flow PV NPV Answer to Question 1: Assuming all salaries are paid at the end of each year, what is the best option for Ben-from a strictly financial standpoint? Answer to Question 2: Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement? A B C D E F G 1 2 Case Title: 3 4 Input: 5 Current Wilton Mount Perry 6 7 Annual Salary Expected increase Number of years 8 9 Tax rate 10 Annual Tuition (BGN) Books 11 12 Length 13 Bonus 14 Health insurance 15 Room & Board 16 Salary After Tax 17 Discount Rate 18 19 *** Assume costs for room and board are the same for all three options. 20 Problem 3 Current Situation Year salary after tax 21 0 1 2 3 4 22 bonus 23 24 Annual Tuition 25 Books 26 27 Health insurance Room & Board Total Cash Flow 28 29 PV 30 NPV 31 32 Wilton 33 34 Year salary after tax bonus 35 36 Annual Tuition 37 38 Books Health insurance Room & Board 39 40 41 Opp. Cost Total Cash Flow PV 42 43 NPV 44 45 Mount Perry 46 Year 47 48 salary after tax bonus Annual Tuition Books 49 50 51 Health insurance 52 Room & Board 53 54 Opp Cost Total Cash Flow PV 55 56 NPV 57 Books Case Title: Input: Current Wilton Mount Perry Annual Salary Expected increase Number of years Tax rate Annual Tuition (BGN) Book Books length Length Bonus Bonus Health insurance Room & Board Salary After Tax Discount Rate Problem 3 *** Assume costs for room and board are the same for all three options. Current Situation Year Year 3 salary bonus Bonus Annual 5 10 12 13 14 1.5 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 salary after tax Annual Tuition Health insurance Room & Board Total Cash Flow PV INPV wilton Year salary after tax bonus Annual Tuition Books Health insurance Room & Board Opp. Cost Total Cash Flow PV NPV Mount Perry Year salary after tax bonus Annual Tuition Books Health insurance Room & Board Opp Cost Total Cash Flow PV NPV Answer to Question 1: Assuming all salaries are paid at the end of each year, what is the best option for Ben-from a strictly financial standpoint? Answer to Question 2: Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement? A B C D E F G 1 2 Case Title: 3 4 Input: 5 Current Wilton Mount Perry 6 7 Annual Salary Expected increase Number of years 8 9 Tax rate 10 Annual Tuition (BGN) Books 11 12 Length 13 Bonus 14 Health insurance 15 Room & Board 16 Salary After Tax 17 Discount Rate 18 19 *** Assume costs for room and board are the same for all three options. 20 Problem 3 Current Situation Year salary after tax 21 0 1 2 3 4 22 bonus 23 24 Annual Tuition 25 Books 26 27 Health insurance Room & Board Total Cash Flow 28 29 PV 30 NPV 31 32 Wilton 33 34 Year salary after tax bonus 35 36 Annual Tuition 37 38 Books Health insurance Room & Board 39 40 41 Opp. Cost Total Cash Flow PV 42 43 NPV 44 45 Mount Perry 46 Year 47 48 salary after tax bonus Annual Tuition Books 49 50 51 Health insurance 52 Room & Board 53 54 Opp Cost Total Cash Flow PV 55 56 NPV 57