The MBA Decision Max Gruber graduated from university 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 would allow him to achieve this goal. After examining schools, he has narrowed down his choice to either Universitt des Geschfts in Austria or Financez l'cole d'affaires in France. 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 programme. Max currently works at the money management firm of Huber and Bauer. His annual salary at the firm is 75,000 and this is expected to increase at 3 per cent per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 50 per cent. Max has a savings account with enough money to cover the entire cost of his MBA programme. The Business School at Universitt des Geschfts is one of the top MBA programmes in Europe. The MBA degree requires two years of full-time enrolment at the university. The annual tuition cost is 60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost 2,500 per year. Max expects that, after graduation from Universitt des Geschfts, he will receive a job offer for about 125,000 per year, with a 25,000 signing bonus. The salary at this job will increase at 4 per cent per year. Because he will be working in Austria, his average income tax rate will remain at 50 per cent. The Financez l'cole d'affaires began its MBA programme 16 years ago. It is smaller and less well known than the Universitt des Geschfts, however the school offers an accelerated one-year programme, with a tuition cost of 75,000 to be paid upon matriculation. Books and other supplies for the programme are expected to cost 3,500. Max thinks that he will receive an offer of 92,000 per year upon graduation, with a 10,000 signing bonus. The salary at this job will increase at 3.5 per cent per year. Because he will be working in France, Max's average tax rate at this level of income will be 41 per cent. Both schools offer a discounted health insurance plan that will cost 3,000 per year, payable at the beginning of the year. Max also estimates that room and board expenses will cost 20,000 per year at either school. The appropriate discount rate is 6.4 per cent. Answer the following questions: 1. How does Max's age affect his decision to get an MBA? 2. What other, perhaps non-quantifiable, factors affect Max's decision to get an MBA? 3. Assuming all salaries are paid at the end of each year, what is the best option for Max - from a strictly financial standpoint? 4. Max 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 Max need to receive to make him indifferent between attending Universitt des Geschfts and staying in his current position? 6. Suppose, instead of being able to pay cash for his MBA, Max must borrow the money. The current borrowing rate is 5.2 per cent. How would this affect his decision? The MBA Decision Max Gruber graduated from university 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 would allow him to achieve this goal. After examining schools, he has narrowed down his choice to either Universitt des Geschfts in Austria or Financez l'cole d'affaires in France. 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 programme. Max currently works at the money management firm of Huber and Bauer. His annual salary at the firm is 75,000 and this is expected to increase at 3 per cent per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 50 per cent. Max has a savings account with enough money to cover the entire cost of his MBA programme. The Business School at Universitt des Geschfts is one of the top MBA programmes in Europe. The MBA degree requires two years of full-time enrolment at the university. The annual tuition cost is 60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost 2,500 per year. Max expects that, after graduation from Universitt des Geschfts, he will receive a job offer for about 125,000 per year, with a 25,000 signing bonus. The salary at this job will increase at 4 per cent per year. Because he will be working in Austria, his average income tax rate will remain at 50 per cent. The Financez l'cole d'affaires began its MBA programme 16 years ago. It is smaller and less well known than the Universitt des Geschfts, however the school offers an accelerated one-year programme, with a tuition cost of 75,000 to be paid upon matriculation. Books and other supplies for the programme are expected to cost 3,500. Max thinks that he will receive an offer of 92,000 per year upon graduation, with a 10,000 signing bonus. The salary at this job will increase at 3.5 per cent per year. Because he will be working in France, Max's average tax rate at this level of income will be 41 per cent. Both schools offer a discounted health insurance plan that will cost 3,000 per year, payable at the beginning of the year. Max also estimates that room and board expenses will cost 20,000 per year at either school. The appropriate discount rate is 6.4 per cent. Answer the following questions: 1. How does Max's age affect his decision to get an MBA? 2. What other, perhaps non-quantifiable, factors affect Max's decision to get an MBA? 3. Assuming all salaries are paid at the end of each year, what is the best option for Max - from a strictly financial standpoint? 4. Max 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 Max need to receive to make him indifferent between attending Universitt des Geschfts and staying in his current position? 6. Suppose, instead of being able to pay cash for his MBA, Max must borrow the money. The current borrowing rate is 5.2 per cent. How would this affect his decision