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 $$69,000$ 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 $26$ 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 $$75,000,$ payable at the

beginning of each school year. Books and other supplies are estimated to cost

$$3,600$ per year. Ben expects that after graduation from Wilton, he will receive a

job offer for about $$115,000$ per year, with a $$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

$16$ 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

$$90,000$ to be paid upon matriculation. Books and other supplies for the program

are expected to cost $$5,400.$ Ben thinks that he will receive an offer of $$96,000$ per

year upon graduation, with an $$18,000$ 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 $$3,500$ per year, payable at

the beginning of the year. Ben also estimates that room and board expenses will

cost $$2,500$ more per year at both schools than his current expenses, payable at the

beginning of each year. The appropriate discount rate is $4\mathrm{.}7$ percent.

$1.$ How does Ben$$s age affect his decision to get an MBA?

$2.$ What other, perhaps nonquantifiable, factors affect Ben$$s decision to get an

MBA?

$3.$ Assuming all salaries are paid at the end of each year, what is the best option

for Ben$$from a strictly financial standpoint?

$4.$ Ben believes that the appropriate analysis is to calculate the future value of each

option. How would you evaluate this statement?

$5.$ What initial salary would Ben need to receive to make him indifferent between

attending Wilton University and staying in his current position?

$6.$ Suppose, instead of being able to pay cash for his MBA, Ben must borrow the

money. The current borrowing rate is $4\mathrm{.}3$ percent. How would this affect his

decision?