THE VALUE OF EDUCATION

Ken Gates graduated from college 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 Mount Perry College or Wilton University. 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.

Ken currently works at the money management firm of Dewey and Louis. His annual salary at the

firm is $77,000 per year, and his salary is expected to increase at 2.5 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.

Mount Perry College began its MBA program 16 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. Ken expects that after graduation from Wilton, he will receive

a job offer for about $120,000 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, his average income tax rate will

increase to 31 percent.

Wilton University offers one of the top MBA programs in the country. Wilton offers an

accelerated, one-year program, with a tuition cost of $80,000 to be paid upon graduation. Books

and other supplies for the program are expected to cost $5,000, payable at the beginning of the

school year. Ken thinks that he will receive an offer of $90,000 per year upon graduation, with an

$30,000 signing bonus. The salary at this job will increase at 4 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 $3,000 per year, payable at the beginning

of the year. Ken 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 6.3 percent per year.

Assuming all salaries are paid at the end of each year, what is the best option for Kenfrom a

strictly financial standpoint?

2. Dewey and Louis herd about Ken's plans and want to make him an offer that will keep him at

his current position. What would the new annual salary be? Assume a tax rate of 31 percent

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