THE MBA DECISION

Page 128Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East Coast Yachts. 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. Bens annual salary at East Coast Yachts is $62,000 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 $66,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,900 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 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 $80,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. Ben thinks that after graduation from Mount Perry, he will receive an offer of $96,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average income 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 5.8 percent. Assume all salaries are paid at the end of each year. How does Bens age affect his decision to get an MBA?

What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position? Assume his tax rate after graduating from Wilton University will be 31 percent regardless of his income level.

^^I have already done the work, but I am not sure if the pre-tax beginning salary is correct. I made a table and guessed a salary, then put a NPV from T3-T40, then I did goak seek to set the NPV to the value in 2 years by changing the bolded salary in T3. My other values are shown. Assuming they are correct, did I calculate the pre-tax beginning salary (highlighted) correctly?

If you do find other errors, I appreciate the guidance, but I am solely focused on getting the salary required so that is the only question listed! Thanks,

-Busy Grad Student Stuck on a Saturday!!

CurrentsalaryYearsuntilretirementSalaryincreaseTaxrateWiltonTuitionperyearBooks&SuppliesStartingsalarySigningbonusSalaryincreaseTaxrateMountPerryTuitionperyearBooks&SuppliesSigningbonusStartingsalarySalaryincreaseTaxrateBothschoolsHealthinsuranceRoom&boardincreaseDiscountrate$$$$$$$$$$$62,000403%26%66,0002,900110,00020,0004%31%80,0004,50015,00096,0003.5%29%3,0002,0005.80% 3. Current job Aftertax income Present value of salary Wilton MBA PV of tuition \& expenses Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition \& expenses PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry 5. Current job PV minus bonus after Wilton costs Value in 2 years Aftertax beginning salary Pretax beginning salary $45,880.00 $1,078,133.32 r 73,900.00$135,868.40 $13,800.00 $12,328.43 $75,900.00 $2,019,915.88 $1,705,596.43 $1,853,793.27 89,500 yr $164,549.69 $13,043.48 $68,160.00 $1,705,901.95 $1,612,383.70 \begin{tabular}{|l|l|} \hline S 1,789,976.87 \\ \hline \end{tabular} $929,936.49 $1,040,937.43 $26,988.72 39,114,08 Uses D7 and don't forget to take away takes. Starting with D39 at Time =1 and the after-tax salary increasing at 3% each year over the rext 39 years ( 40 periods of salaries), what is the present value today of these Present value of D13,D14,D29, and D30 now (this year) plus next year discounted at 5.8% After-tan value of signing bonus D16 Present value of D46 brought back 2 years at 5.8% discount rate After-tan value of D15 Starting with D50 at Time= 3 and the after-tax salary increasing at 4% each year over the hent 37 years ( 38 periods of salaries], what is the present value of these yearly What is the PV of D52 today discounted at 5.8% ? Sum of D44, D48, D54 Reflects D21,D22,D29,D30 After-tax value of signing bonus D23 brought back one year at 5.8% After-tan value of D24 Starting with D63 at Time= 2 and the after-tax salary increasing at 3.5% each year over the neut 38 years [ 39 periods of salaries], what is the present value of these year What is the PV of D65 today discounted at 5.8% ? Sum of D59, D61, D67 d78-(1-taxrt) Goal Seek on J78 39.114 .08 $1,040,937.43 CurrentsalaryYearsuntilretirementSalaryincreaseTaxrateWiltonTuitionperyearBooks&SuppliesStartingsalarySigningbonusSalaryincreaseTaxrateMountPerryTuitionperyearBooks&SuppliesSigningbonusStartingsalarySalaryincreaseTaxrateBothschoolsHealthinsuranceRoom&boardincreaseDiscountrate$$$$$$$$$$$62,000403%26%66,0002,900110,00020,0004%31%80,0004,50015,00096,0003.5%29%3,0002,0005.80% 3. Current job Aftertax income Present value of salary Wilton MBA PV of tuition \& expenses Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition \& expenses PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry 5. Current job PV minus bonus after Wilton costs Value in 2 years Aftertax beginning salary Pretax beginning salary $45,880.00 $1,078,133.32 r 73,900.00$135,868.40 $13,800.00 $12,328.43 $75,900.00 $2,019,915.88 $1,705,596.43 $1,853,793.27 89,500 yr $164,549.69 $13,043.48 $68,160.00 $1,705,901.95 $1,612,383.70 \begin{tabular}{|l|l|} \hline S 1,789,976.87 \\ \hline \end{tabular} $929,936.49 $1,040,937.43 $26,988.72 39,114,08 Uses D7 and don't forget to take away takes. Starting with D39 at Time =1 and the after-tax salary increasing at 3% each year over the rext 39 years ( 40 periods of salaries), what is the present value today of these Present value of D13,D14,D29, and D30 now (this year) plus next year discounted at 5.8% After-tan value of signing bonus D16 Present value of D46 brought back 2 years at 5.8% discount rate After-tan value of D15 Starting with D50 at Time= 3 and the after-tax salary increasing at 4% each year over the hent 37 years ( 38 periods of salaries], what is the present value of these yearly What is the PV of D52 today discounted at 5.8% ? Sum of D44, D48, D54 Reflects D21,D22,D29,D30 After-tax value of signing bonus D23 brought back one year at 5.8% After-tan value of D24 Starting with D63 at Time= 2 and the after-tax salary increasing at 3.5% each year over the neut 38 years [ 39 periods of salaries], what is the present value of these year What is the PV of D65 today discounted at 5.8% ? Sum of D59, D61, D67 d78-(1-taxrt) Goal Seek on J78 39.114 .08 $1,040,937.43