THE MBA DECISION

Sharon Bates graduated from college six years ago with a finance undergraduate degree. Although she is satisfied with her current job, her goal is to become an investment banker. She feels that an MBA degree would allow her to achieve this goal. After examining schools, she narrowed her choice to Mount Perry College. Although internships are encouraged by the business school, to get class credit for the internship, no salary can be paid. Other than internships, the school doesnt allow its students to work while enrolled in its MBA program. Sharon currently works at the money management firm of Dewey and Louis. Her annual salary at the firm is $120,000 per year, and her salary is expected to increase at 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 40 more years. Her current job includes a fully paid health insurance plan, and her current average tax rate is 26 percent. Mount Perry College began its MBA program 76 years ago. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $70,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year, also payable at the beginning of each school year. Sharon expects that after graduation from Mount Perry, she will receive a job offer for about $160,000 per year, with a $25,000 signing bonus. The salary at this job will increase at 3.5 percent per year. Because of the higher salary, her average income tax rate will increase to 31 percent. Additional expenses relative to staying at the same job: the school offers a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Sharon also estimates that room and board expenses will cost $2,000 more per year at the school than her current expenses, payable at the beginning of each year. Sharons appropriate discount rate is 6.3 percent per year.

Questions:

1. Assume that all salaries are paid at the end of each year. The signing bonus is paid upfront. What is the best option for Sharonfrom a strictly financial standpoint (i.e., PV of cash flows and expenses)?

2. Dewey and Louis herd about Sharons plans and want to make her an offer that will keep her in her current position. What would her new annual salary be? Assume a tax rate of 31 percent

3. What other, perhaps nonquantifiable factors can affect Sharons decision to get an MBA?

Notes for solution:

1. The PV calculation of Dewey and Louis is straightforward and is only based on the discounted value of future salaries. The PV of Mount Perry includes both income and expense components. Note that school tuition, health, boarding, and supply expenses are in terms of incremental costs. So you need to include the PV of these expenses.

2. For question 2, Dewey and Louis will match the PV ( Present Value)found in question 1 by updating Sharons

salary.