The MBA Decision Ben Bates 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 his 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. Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $60,000 per year, and his salary expected to increase at 3 % 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 %. Ben has 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 $65,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3000 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 % per year. Because of the higher salary, his average income tax rate will increase to 31 %. 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 he will receive an offer of $92,000 per year upon the graduation, with an $18,000 signing bonus. The salary at this job will increase at 3.5 % per year. His average tax rate at this level of income will be 29 %. 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 6.5 percent.

1. How does Ben’s age affect his decision to get an MBA? My opinion, Age is one of the important factor that affects someone decision to continue study. In this case, Ben is now 28 years old. He graduated from college six years ago when he’s age is 22 years old. Assuming that Ben already working for about 5 years

First. But if he has no willingness to study.5% G (growth rate) = 3% T (the number of period working) = 40 So the PV is = $935. he could do anything else. he will continue the study. Assuming all salaries are paid at the end of each year. tax rate = 26%. for example having jobs that would pay more or open the business. so that he would have enough money from salary saving in 5 years to do his MBA at 28 years age. The third is his willingness to continue the study.49 . this will affect Ben’s decision because spouse or children supporting is also important. Keeping his current work for 40 years There are several factors to be considered to calculate the present values (PV) of the first options are: His annual salary at the firm is $60. If he starts the MBA program on 28 years old. I think the current family situation. he will start working again for 40 more years after getting the MBA. Salary = $60. 3. to get the present value (PV). If he married with or without children. I think when assuming that Ben already working for about 5 years since graduated from college. c = $44. 2.400 R (discount rate) = 6. he will spend two years for study and perhaps finish his MBA at 30 years old.000. In this case. what is the best option for Ben – from a strictly financial standpoint? I think there are three options have to be calculated: 1.5 percent.since graduated from college. his current average tax rate is 26 % and discount rate is 6. age affects his decision for getting an MBA. he has job experiences as the MBA program usually put the requirement to the candidates at least having two years experiences in his respective field. If he eager to continue the study. With those reasons. Second. we can use the formula of growing annuity. because of tax rate. What other. perhaps no quantifiable factors affect Ben’s decision to get an MBA? My opinion is there are several non quantifiable factors affect Ben’s decision to get an MBA. At 30 years old. and his salary expected to increase at 3 % per year until retirement.283.000 per year.

Getting the MBA at Wilton University In this case. PV of signing bonus C.000 per year.000.68 B.804. with a $20. his average income tax rate will increase to 31 %. PV of 2 years salary when he would work at the money management firm. so. books and supplies.2. health insurance and rent fee) D.900 R (discount rate) = 6.927. Salary = $110. C = $75. tax rate = 31%.000 . PV of costs for 2 years (tuition. Because of the higher salary. A. PV of salary for 38 years The factors to consider are: He will receive a job offer for about $110. must compute 4 parts: A. 5% G (growth rate) = 4% T (the number of period working) = 38 So the PV is = $ 1.000 signing bonus. The salary at this job will increase at 4 % per year. PV of salary for 38 years (40 – 2 years) B. PV of signing bonus The factors to consider are: Signing bonus = $ 20.

000 per year. Health insurance plan that will cost $3.000 R (discount rate) = 6.811.18 3.5% G (growth rate) = 3% T (the number of period working) = 2 So the PV is = $ 82. c = $44.400 R (discount rate) = 6.010. must compute 4 parts: .000.000 * 2 years= $146.20 C.584.000 per year. and his salary expected to increase at 3 % per year until retirement.000. Getting the MBA at Mount Perry College In this case. Cost = $ 73. The factors to consider are: His annual salary at the firm is $60. 5% T (the number of period studying) = 2 So the PV is = $ 265. tax rate = 26%. PV of 2 years salary when he would work at the money management firm. Books and other supplies are estimated to cost $3000 per year.5 percent. books and supplies. because of tax rate.R (discount rate) = 6. his current average tax rate is 26 % and discount rate is 6.46 D. 5% T (the number of period working) = 38 So the PV is = $ 279. Salary = $60. health insurance and rent fee) The factors to consider are: tuition $65. PV of cost for years ((tuition.000. room and board expenses will cost $2.

PV of costs for 2 years (tuition.75 . PV of signing bonus The factors to consider are: Signing bonus = $ 18.320 R (discount rate) = 6. C = $ 65. PV of signing bonus C.000. The salary at this job will increase at 3.5 % per year.896.A.462. 5% T (the number of period working) = 39 So the PV is = $ 253. health insurance and rent fee) A. so. tax rate = 29%. PV of salary for 39 years The factors to consider are: he will receive an offer of $92. PV of salary for 39 years (40 – 1 years) B.169..46 B. His average tax rate at this level of income will be 29 %. 5% G (growth rate) = 3. books and supplies.000 R (discount rate) = 6.000 per year upon the graduation. 5% T (the number of period working) = 39 So the PV is = $ 1. Salary = $ 92.

5% T (the number of period studying) = 1 So the PV is = $ 84. Since Ben has savings account with enough money to cover the entire cost of his MBA program.5 percent. books and supplies. health insurance and rent fee) is $ 265.037.000. c = $44. How would you evaluate this statement? 1.46 and the present value study expenses at Mount Perry College (tuition. health insurance and rent fee) The factors to consider are: tuition $ 80. He will receive more money after finishing the study and get salary and signing bonus with total present value $2.56 D. books and supplies.000. Keeping his current work for 40 years . his current average tax rate is 26 % and discount rate is 6. The factors to consider are: His annual salary at the firm is $60.000. PV of cost for years ((tuition. Health insurance plan that will cost $3.500. because of tax rate. it is the best option for him to get the MBA at Wilton University 4.400 R (discount rate) = 6. and his salary expected to increase at 3 % per year until retirement.037. Cost = $ 89.5% G (growth rate) = 3% T (the number of period working) = 1 So the PV is = $ 41. PV of 1 year’s salary when he would work at the money management firm.88. Ben believes that the appropriate analysis is to calculate the future value of each option. Books and other supplies for the program are expected to cost $4.000 per year.14 So the best option for Ben Bates is getting the MBA at Wilton University. room and board expenses will cost $2. health insurance and rent fee) is $ 84.084.511. Salary = $60.000 per year.56. tax rate = 26%. books and supplies.500 R (discount rate) = 6.C.690.811. The present value study expenses at Wilton University (tuition.

000 signing bonus. his current average tax rate is 26 %.834. The salary at this job will increase at 4 % per year.000 per year. FV of signing bonus A.000. we can use the formula of growing annuity. FV of salary for 38 years The factors to consider are: He will receive a job offer for about $110. C = $75. Salary = $60. so. In this case.000.000 per year.94 . because of tax rate. his average income tax rate will increase to 31 %.There are several factors to be considered to calculate the future values (FV) of the first options are: His annual salary at the firm is $60. Getting the MBA at Wilton University In this case. to get the present value (PV). must compute 4 parts: A. Salary = $110. tax rate = 31%.905. tax rate = 26%. FV of salary for 38 years (40 – 2 years) B.400 G (growth rate) = 3% T (the number of period working) = 40 So the FV is = $ 144. Because of the higher salary. c = $44. and his salary expected to increase at 3 % per year until retirement.900 G (growth rate) = 4% T (the number of period working) = 38 So the FV is = $ 336.48 2. with a $20.

Getting the MBA at Mount Perry College In this case.000 3. FV of signing bonus The factors to consider are: Signing bonus = $ 20.000. tax rate = 29%.873.5 % per year.. FV of salary for 39 years The factors to consider are: he will receive an offer of $92. Salary = $ 92. The salary at this job will increase at 3.000 G (growth rate) = 0 % T (the number of period working) = 38 So the FV is = $ 20. 5% T (the number of period working) = 39 So the FV is = $ 249.000 per year upon the graduation. FV of signing bonus A.320 G (growth rate) = 3. FV of salary for 39 years (40 – 1 years) B. C = $ 65. must compute 4 parts: A. His average tax rate at this level of income will be 29 %.B. FV of signing bonus . so.28 B.

The factors to consider are: Signing bonus = $ 18. 06 C1 = $ 1. 5.927. The best choice is he having an amount highest is $75.000 G (Growth rate) = 0% T (the number of period working) = 39 So the FV is = $ 18.320 is equal to future value $ 249.900 today and taking $ 336.927.873. PV2 = $ 1. Meaning he has to study at Wilton University today with cost him $73.96 The amount $ 85. PV 1 = $935.000 signing bonus for 38 equal time periods. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position? Staying in his current position.06C1 = $75.905. The present value of salary $ 65.961.283. the salary before tax deduction is $ 107.804.905.804.96 already deducted with 26% taxed.000 signing bonus when having a job for 39 years after getting the MBA at Mount Perry College.905.000 today which would end up giving him $336.400 when keeping his current work for 40 years.900 is equal to future value $ 336. the initial salary would Ben need .900 * 23.000 By calculate the future value of each option: The present value of his salary $44. The present value of salary $75.68 C1 = $85.400 is equal to future value $144.49 Getting the MBA at Wilton University.78.28 plus $18.000 signing bonus when having a job for 38 years after getting the MBA at Wilton University.683.683.94 plus $ 20.68 When PV1=PV2 21.94 at the end of 38 times periods. So.78 21.94 plus $20.

00 34.787.30 interest paid 7.884. Ben must borrow the money.to receive to make him indifferent between attending Wilton University and Staying in his current position is $107.096.51 29. The current borrowing rate is 5.787.19 (0.041.40 30.480.096.30 R (discount rate) = 6.480.06 92.00 6.80 .84 32.000.55 4.160.06 119.875.580.404.06 Amortization table 1. 5% T (the number of period) = 5 So the PV is = $ 708. 4%.5% and period five years: C = $170.04 32.28 principal paid 26.20 146.691.160.43 34.94 34. instead of being able to pay cash for his MBA.04 34. Getting the MBA from Wilton University Ben Bates must borrow $146.000 to get the MBA at the Wilton University for two years. Assuming he pay out the principal plus interest every year for five years: Loan amount : $146. 4% Long term : 5 Loan payment : $ 34.94 92.4%.627.349.30.961.000 Interest rate : 5.19 34. The current borrowing rate is 5.041.468.22 1.0: beginning total payment balance 146.349.01) 1 2 3 4 5 The total payment in five years is $170.119.096.66 3.746.86 24.78 6.349.976.06 27.06 63.096.212.580. Then.000.096.43 63. Suppose. when we calculated the present value with discount rate 6.096.06 Totals 170.06 32. How would this affect his decision? There are two options: 1.01 ending balance 119.

833.006.35 16.50 20. 5% T (the number of period) = 5 So the PV is = $ 434. the total payment is 104.1.901.495.0.850.04 17.02 19. From strictly financial standpoint.35 Amortization table 1.830.5% and period five years: C = $104.85 15.75 is equal with present value $ 434.050.814. Assuming he pay out the principal plus interest every year for five years: Loan amount : $89.44 From the table 1.965.901.901.293.431.506.78 to make him indifferent between attending Wilton University and staying in his current position.30 is equal with present value $ 708.086.75 principal paid 16.500 Interest rate : 5.35 2 73.500 to get the MBA at the Mount Perry College for one year.35 5 19.65 20.35 4 38.901. These will affect his decision to continue study.35 Totals 104.875. Then. 4% Long term : 5 Loan payment : $ 20.50 0. Ben need to receive an initial salary around $107.83 1.500.645. The current borrowing rate is 5.431.901.830.645.480. he is still can continue the study at Wilton University.00 3.2.961. Getting the MBA from Mount Perry College Ben Bates must borrow $ 89.00 ending balance 73. when we calculated the present value with discount rate 6.936.495.830. 4%.75 interest paid 4.500.068. .1: beginning total payment balance 1 89.293.52 19.35 3 56.00 20.76 2.59 18.506.65 56.00 The total payment in five years is $104. Another alternative is that if he is not continue the study.61 20.50 89.75 R (discount rate) = 6.31 3.4%.80. if Ben must borrow the money with current rate 5.070.901. From table 1.504.61 38.44.75.02 20.506. the total payment is 170.