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 doesn't allow its students to work while enrolled in its MBA program. Sharon currently works at the money management firm of Dewey and Louis. Sharon's annual salary at the firm is $120,000 per year, and her salary is expected to increase by 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 40 more years and retire at age 68. Her current average tax rate is 26 percent. For simplicity, the annual salary is received at the end of the year. 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. Sharon expects that after graduation from Mount Perry, she will receive a job offer for about $250,000 per year, with a $30,000 signing bonus. The signing bonus will be paid at the end of year 2. The first salary will be paid at the end of year 3. The last salary payment will be at the end of year 40 (i.e., when Sharon is 68). The salary is expected to increase by 3.5 percent per year. Because of the higher salary, her average income tax rate will increase to 31 percent. Both salary and bonus components are taxed at the average tax rate. Sharon's appropriate discount rate is 6.3 percent per year.

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 doesn't allow its students to work while enrolled in its MBA program. Sharon currently works at the money management firm of Dewey and Louis. Sharon's annual salary at the firm is $120,000 per year, and her salary is expected to increase by 2.5 percent per year until retirement. She is currently 28 years old and expects to work for 40 more years and retire at age 68 . Her current average tax rate is 26 percent. For simplicity, the annual salary is received at the end of the year. 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. Sharon expects that after graduation from Mount Perry, she will receive a job offer for about $250,000 per year, with a $30,000 signing bonus. The signing bonus will be paid at the end of year 2 . The first salary will be paid at the end of year 3 . The last salary payment will be at the end of year 40 (i.e., when Sharon is 68). The salary is expected to increase by 3.5 percent per year. Because of the higher salary, her average income tax rate will increase to 31 percent. Both salary and bonus components are taxed at the average tax rate. Sharon's 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 when the contract is signed. Both the salary and signing bonus are taxed at Sharon's average tax rate. Expenses are not tax deductible. What is the best option for Sharon-from a strictly financial standpoint (i.e., PV of cash flows and expenses)? (70 points: 30 and 40) 2. Dewey and Louis heard about Sharon's plans and wanted to make her an offer that would keep her in her current position. What would her new annual salary be? Assume a tax rate of 31 percent ( 30 points) Notes for solution: 1. The PV calculation of Dewey and Louis is straightforward based on a growing annuity PV=rgSalary(1tax)[1(1+r1+g)r] 2. The PV of Mount Perry includes both income and expense components. So you need to calculate the PV of both and report the net. Make sure to find the PV at time 0. 3. For question 2, Dewey and Louis will match the PV found in question 1 by updating Sharon's salary. The tax rate will increase to 31% from 26%. All other parameters (N,g,r) are the same as those reported for Dewey and Louis above. PVMawifery=rgUpdatedSalary(1tax)[1(1+r1+g)T]