The MBA Decision

Raj Danielson 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 degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.

Raj currently works at the money management firm of Prash and Sid. His annual salary at the firm is $$55,000$ and his salary is expected to increase at $3$ percent per year until retire$-$ment. 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. Raj has a savings account with enough money to cover the entire cost of his MBA program.

The Sentinel School of Business at Assiniboine 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 $$63,000,$ payable at the beginning of each school year. Books and other supplies are estimated to cost $$2,500$ per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for about $$98,000$ per year, with a $$15,000$ 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 Pond School of Business at the University of Passy began its MBA program $16$ years ago. The Pond School is smaller and less well known than the Sentinel School. It offers an accelerated one$-$year program, with a tuition cost of $$80,000$ to be paid upon matriculation. Books and other supplies for the program are expected to cost $$3,500.$ Raj thinks that he will receive an offer of $$81,000$ per year upon graduation, with a $$10,000$ 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 $$300$ per year, payable at the beginning of the year. Raj also estimates that room and board expenses will cost $$20,000$ per year at both schools. The appropriate discount rate is $6\mathrm{.}5$ percent.

Analyze the case by answering the assigned questions:

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

$2.$ What other non$-$quantifiable factors affect Raj$$s decision to get an MBA

$3.$ What is the best option for Raj from a strictly a financial standpoint?

Show your workings for the following three choices:

$($i$)$ remain at his current job

$($ii$)$ pursue an Assiniboine MBA

$($iii$)$ pursue a Passy MBA

$4.$ Evaluation of the Raj$$s statement

$5.$ Determination of breakeven initial salary

$6.$ Impact of current borrowing rate on Raj$$s decision

Note: No calculation is required for Q$6.$ However, if you wish, you may use the numbers in the case to solve the question.

Use the following additional Assumptions when analyzing the case.

$1.$ For question $3,$ note that there are three options to consider, namely:

$($i$)$ Remain at current job:

$($ii$)$ Assiniboine MBA:

$($iii$)$ Passy MBA:

$2.$ Books and supplies, Room and board are all payable at the beginning of the year

Hint: Room and board will be the same for both MBA options, the impact or PV on both programs is the same and hence, redundant. You can ignore it$.$ Alternatively, you can include it in your analysis. If you choose to include it$,$ assume that the expense will be incurred at the beginning of the year. While your answer will differ by the PV of the room and board, it will not affect the choice$/$decision you are making.

$3.$ Salaries and bonuses should be estimated on an after$-$tax basis.

$4.$ If he decides to get an MBA, the after$-$tax salary will become an indirect cost $($opportunity cost$)$ of doing the MBA. Hence, the lost salary should be considered as indirect cost of pursuing the MBA degree.