GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Trang Du Thục Hạnh Student ID number: 31171020002

Student name: Nguyễn Hoàng Thanh Hiền Student ID number: 31171020045

Student name: Trần Thị Minh Hoa Student ID number: 31171020282

Student name: Kiều Quang Huy Student ID number: 31171021616

Student name: Student ID number:

UNIT AND TUTORIAL DETAILS

Unit name: Corporate Finance Unit number:

Tutorial/Lecture: Class day and time: Session 10
Lecturer or Tutor name: Từ Thị Kim Thoa, Võ Hồng Đức
ASSIGNMENT DETAILS

Title:
Length: Due date: Date submitted:

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Running head: THE MBA DECISION 2

Mini Case 4: The MBA Decision

Group 2
Trang Du Thuc Hanh
Nguyen Hoang Thanh Hien
Tran Thi Minh Hoa
Kieu Quang Huy
Course: Corporate Finance
6 March, 2019
Lecturers: Tu Thi Kim Thoa, Vo Hong Duc
THE MBA DECISION 3

Overview of the problem

Ben Bates:
- 28 years old, expected to work for 40 more years
- Graduated from college 6 years ago with a finance undergraduate degree
- Goal: Become an investment banker
- Objective: Get the MBA degree
- Current job:
o Annual salary: $65,000, expected to increase 3% per year until retirement
o Average tax rate 26%
- If he studies the MBA, below are what he has to consider:
o Health insurance plan: $3,000 per year
o Room and board expense: $2000 more per year, payable at the beginning of the
year
o Appropriate discount rate: 6.3%

Wilton University Mount Perry College

- Top program in the country
- 2 years of full-time enrolment
- Annual tuition: $70,000,
Overview of payable at the beginning of the
school school year
- Books and other supplies:
- Smaller and less well-known
than Wilton
- One-year program
- Tuition fee: 85,000 paid
upon matriculation
- Books and other supplies:
$4,500

- $110,000 annual salary, - $92,000 annual salary,

Future job increase 4% per year increase 3.5% per year
expectation - $20,000 signing bonus - $18,000 signing bonus
- Tax rate: 31% - Tax rate: 29%
THE MBA DECISION 4

Question 1
Ben’s age affects his decision on studying for the MBA program because he is now 28 years
old. It is told that the age of retirement is 68 years old leaving Ben only 20 years of high payroll. If
Ben had taken the program sooner, he would receive the benefit of having higher salary longer, he
would be able to work for a longer number of years to compensate for his expenses and tuition fee
for the program.
Moreover, considering Ben’s late MBA attendance, the value of the program offered might
not be enough to compensate the opportunity cost during the year of the MBA when he is not
allowed to work while taking the degree.

Question 2
Non-quantifiable factors affect Ben’s decision:
 do Ben enjoy the job that he is doing or the industry that he is in?
 if Ben stays at his current job, will he ever get a promotion or a raise that is higher
than the current 3%?
 whether his salary estimation after MBA is valid or not? If not, he will receive lower
 if his estimation was correct, which company offers that level of salary

Question 3
Discount rate = r = 6.3%

Option 1: Ben continues his current job

C = 65,00; g = 3%; T=40; tax rate = 26%
Option 2: Go to Wilton University
C = 110,000; g = 4%; T =38; tax rate = 31%; bonus = 20,000
Option 3: Go to Mount Perry College
C = 92,000; g =3.5%; tax rate = 29%; bonus = 18,000
Calculation:
65,000 1.03 40
PV1 = × [1 − (1.063) ]
0.063−0.03

𝐸𝐴𝑇1 = 𝑃𝑉1 × (1 − 0.26) = 1,044,728.367

110,000 1.04 38
𝑃𝑉2 = × [1 − ( ) ] = 2,699,712.194
0.063 − 0.04 1.063
THE MBA DECISION 5

20,000 1 2
𝐵𝑜𝑛𝑢𝑠 𝑃𝑉2 = × [1 − ( ) = 36,514.27606]
0.063 1.063
𝐸𝐴𝑇2 = (𝑃𝑉2 + 𝐵𝑜𝑛𝑢𝑠 𝑃𝑉2) × (1 − 0.31) = 1,887,996.264
1.035 39
1 − (1.063)
𝑃𝑉3 = 92,000 × = 2,125,585.717
0.063 − 0.035
1
1 − 1.063
𝐵𝑜𝑛𝑢𝑠 𝑃𝑉3 = 18,000 × = 16,933.2079
0.063
𝐸𝐴𝑇3 = (𝑃𝑉3 + 𝐵𝑜𝑛𝑢𝑠 𝑃𝑉3) × (1 − 0.29) = 1,521,188.437

In conclusion, the option 2 – going to Wilton University is the best choice out of 3 because it will
give the highest present value (1,887,996.264) after tax provided that Ben can pay for all his MBA
cost.
Question 4
Calculating the future value of each options does not give a more accurate analysis. Because
the present values reflect the value of each option in the present which means it had accounted for
the discount rate, the risk and value while future value calculations do not. Therefore, using present
value to compare from a financial standpoint is more appropriate.
Question 5
The required PV to make Ben’s Wilton MBA exactly be indifferent with his current job will
equal:
1+𝑔 𝑡
1 − ( 1+𝑟 )
𝐶 = 𝑃𝑉 ÷
𝑟−𝑔
Then
1.04 38
1 − (1.063)
𝐶 = 1,411,795.091 ÷ = 57,523.71
0.063 − 0.04
Ben needs annual salary of $57,523.71 for his current job in order to make him stay in the
current job.
Question 6
Suppose Ben has to borrow money to pay for his MBA with the borrowing rate of 5.4%. He
will have to consider about the cost of borrowing and the due he has to pay back the loan. However,
this change will not affect Ben’s decision because whether he can afford or he has to borrow money,
the cost of studying is the same. Therefore, borrowing money for studying will not affect Ben’s
decision.