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 $53,000 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 $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2000 per year. Ben expects that after graduation from Wilton, 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 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 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 $4,200. Ben 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 percent per year. His average tax rate at this level of income will be at 29%.

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 5.5 percent.

Answer the following questions (Q1- Q3).

1. Age is obviously an important factor. The younger an individual is, the more time there is for the (hopefully) increased salary to offset the cost of the decision to return to school for an MBA.

Age is one of the important factor that affects someone decision to continue study. In this case, Ben is now 28 years old. If he starts the MBA program on 28 years old, he will spend two years for study and perhaps finish his MBA at 30 years old. At 30 years old, he will start working again for 40 more years after getting the MBA. With those reasons, age affects his decision for getting an MBA.

2. Perhaps the most important non-quantifiable factors would be whether or not he is married and if he has any children. With a spouse and/or children, he may be less inclined to return for an MBA since his family may be less amenable to the time and money constraints imposed by classes. Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary.

he has job experiences as the MBA program usually put the requirement to the candidates at least having two years experiences in his respective field. If he married with or without children, this will affect Bens decision because spouse or children supporting is also important.

3. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. In this analysis, the reduction in room and board costs are relevant since they are a saved expense. We need to find the after-tax value of each, so:

Remain at current job:

After-tax salary = $53,000(1 .26) = $39,220

His salary will grow at 3 percent per year, so the present value of his after-tax salary is:

PV = C {1 [(1 + g) / (1 + r)]^t} / (r g)]

PV = $39,220{[1 [(1 + .03) / (1 + .055)]³⁸} / (.055 .03)

PV = $938,149.63

Wilton MBA:

Costs:

The direct costs include tuition, books and supplies, and health insurance. We need to also include the savings in room and board as a reduction of costs.

Total direct costs = $58,000 + 2,000 + 3,000 4,000 = $59,000

PV of direct costs = $59,000 + 59,000 / (1.055) = $114,924.17

Salary:

PV of after-tax bonus paid in 2 years = $10,000(1 .31) / 1.055² = $6,199.32

After-tax salary = $87,000(1 .31) = $60,030

His salary will grow at 4 percent per year. We must also remember that he will now only work for 36 years, so the present value of his after-tax salary is:

PV = C {1 [(1 + g) / (1 + r)]^t} / (r g)]

PV = $60,030{[1 [(1 + .04) / (1 + .055)]³⁶} / (.055 .04)

PV = $1,612,050.35

Since the first salary payment will be received three years from today, so we need to discount this for two years to find the value today, which will be:

PV = $1,612,050.35 / 1.055²

PV = $1,448,350.53

So, the total value of a Wilton MBA is:

Value = $114,924.17 + 6,199.32 + 1,448,350.53 = $1,339,625.68

Mount Perry MBA:

Costs:

Salary:

So, the total value of a Mount Perry MBA is:

Value =