Case study – Decision to get an MBA

Question no 1. How does Ben’s age affect his decision to get an MBA?

Age has a significant role in Ben’s decision to get an MBA, where Ben is 28 years now,

and he got his finance undergraduate degree when he was 22 which was 6 years ago. He has

been working at a money management firm and dreams to become an investment banker and

work till the age of 66. Throughout his working year, we will consider that he has generated

enough savings that will be used during his MBA study period. As Ben is 28 years old which is

nether to fast nor to slow to resume his study and he will be working for next 30 31 years which

will give him plenty of years ahead to get the return through his investment on his studies. While

acquiring MBA will also help him to achieve his dream goal in near future. So, age does play an

significate role in Ben’s decision to get an MBA, as if started his studies any later, the ROI will

be reduced which will further decrease his desire to get an MBA.

Question no 2. What other, perhaps non-quantifiable, factors affect Ben’s decision to get an

MBA?

Other different factors that might affect the Ben’s decision to get an MBA are:

1. His determination to become an investment banker. As he thought of pursuing MBA in

the first place because he believed this degree will help him to achieve his dream of being

an investment banker.

2. His family responsibilities. It is not mentioned in the case if Ben is single or married. But

if he is married than he will have greater family responsibilities which might be difficult

to fulfill while pursuing full time MBA program.

3. His job satisfaction level will also have a significant impact on his further decision.
Question no 3. Assuming all salaries are paid at the end of each year, what is the best option for

Ben—from a strictly financial standpoint?

Ben currently has 3 options for himself and they are, 1. To get an MBA from the Ritter College

of Business at Wilton University which requires 2 full year to complete the studies, 2. To get an

MBA from The Bradley School of Business at Mount Perry College which requires 1 full year to

complete the studies, and 3. To continue his work at money management firm. In this analysis,

we have considered health insurance, room rent and boarding expenses to remain constant.

Tabulating the particulars:

Particulars Money MBA @ MBA @

Management Wilton Mount Perry

Firm University College

Annual Salary $57,000 $91,000 $81,000

After Tax Salary 42180 62790 57510

Discount Rate 5.5% 5.5% 5.5%

Salary Growth rate 3% 4% 3.5%

Total working year ahead 38 36 37

Signing Bonus 0 $10,000 $8,000

       

Cost for MBA      

Annual Tuition Fee   $62,000 $84,000

Books and Other Supplies   $2,000 $4,200

Health Insurance Cost   $3,000 $3,000

Rent & Boarding expenses   $4,000 $4,000

 Period (years to complete)   2 1

Calculations

1. For current job

Salary after tax (C) = $42,180

Salary Growth Rate (g) = 3%

Rate (r) = 5.5%

Total working year ahead (n) = 38

PVA = C {[1 – (1 + g) / (1 + r) ^n] / (r – g)}

= 42180 {[1 – (1 + 0.03) / (1 + 0.055) ^38] / (0.055 – 0.03)}

= 42180 [(1 – 1.03 / 7.6488) / 0.025]

= 42180 [0.8653 / 0.025]

= 42180 * 34.612

= $1,459,934.16

2. For MBA @ Wilton University

 PVA for Salary

Salary after tax (C) = $62,790

Salary Growth Rate (g) = 4%

Rate (r) = 5.5%

Total working year ahead (n) = 36

 PVA = C {[1 – (1 + g) / (1 + r) ^n] / (r – g)}

= 62790 {[1 – (1 + 0.04) / (1 + 0.055) ^36] / (0.055 – 0.04)}

= 62790 [(1 – 1.04 / 6.8721) / 0.015]

= 62790 (0.8487/ 0.015)

= 62790 * 56.58

= $3,552,658.2

Present Value to be received after MBA = 3,552,658.2 / 1.0552

Which amounts to $3,191,894.34.

 PV for Signing bonus

Future Value (FV) = $10,000

Total Years (n) = 2

Rate (r) = 5.5%

Present Value (PV) = FV / (1 + r) ^n

= 10000 / (1 + 0.055) ^ 2

= 10000 / 1.113025

= $8,984.5241

 PV for MBA cost (2 Years)

Future Value (FV) = $133,000 (adding total investment)

Rate (r) = 5.5%

Years (n) = 2

Present Value (PV) = FV / (1 + r) ^n

 = 133000 / (1 + 0.055) ^ 2

= $119,494.17

 PV of opportunity cost

Future Value (FV) = $42,180

Rate (r) = 5.5%

Year (n) = 2

Present Value (PV) = FV / (1 + r) ^n

= 42,180 / (1 + 0.055) ^ 2

= $37,896.72

Net Present Value (NPV) of MBA @ Wilton University = 3,191,894.34+ 8,984.5241 –

119,494.17 – 37,896.72

= $3,282,476.3141

3. For MBA @ Mount Perry College

 PVA for Salary

Salary after tax (C) = $57,510

Salary Growth Rate (g) = 3.5%

Rate (r) = 5.5%

Total working year ahead (n) = 37

 PVA = C {[1 – (1 + g) / (1 + r) ^n] / (r – g)}

= 57,510 {[1 – (1 + 0.035) / (1 + 0.055) ^37] / (0.055 – 0.035)}

= 57,510 [(1 – 1.035 / 7.2501) / 0.02]

= 57,510 [0.8572 / 0.02]

= 57,510 * 42.86

= $2,464,878.60

Present Value to be received after MBA = 2,464,878.60 / 1.055

Which amounts to $2,336,377.82

 PV for Signing bonus

Future Value (FV) = $8,000

Total Years (n) = 1

Rate (r) = 5.5%

Present Value (PV) = FV / (1 + r) ^n

= 8000 / 1.055

= $7,582.9384

 PV for MBA cost (1 Year)

Future Value (FV) = $95,200 (adding total investment)

Rate (r) = 5.5%

 Years (n) = 1

Present Value (PV) = FV / (1 + r) ^n

= 95200 / 1 + 0.055

= $90,236.97

 PV of opportunity cost

Future Value (FV) = $42,180

Rate (r) = 5.5%

Year (n) = 1

Present Value (PV) = FV / (1 + r) ^n

= 42,180 / (1 + 0.055) ^ 1

= $39,981.04

Net Present Value (NPV) of MBA @ Mount Perry College = 2,336,377.82+ 7,582.9384 –

90,236.97 – 39,981.04

= $2,213,742.7484

Doing MBA from Wilton University id the best option for Ben for his future from a

strictly financial point of view as it yields higher return than the other two option.

Question no 4. Ben believes that the appropriate analysis is to calculate the future value of each

option. How would you evaluate this statement?

Future value of working in the money management firm,

FV = PV * (1 + r) ^n

= 1,459,934.16 * (1.055) ^38

= $11,166,748.54

Future Value of studying MBA @ Wilton university

FV = PV * (1 + r) ^n

= 3,282,476.3141* (1.055) ^36

= $22,557,457.499

Future Value of studying MBA @ Mount Perry College

FV = PV * (1 + r) ^n

= 2,213,742.7484 * (1.055) ^37

= $16,049,745.788

Even though, he is correct that calculating future value of the each decision will help us to

determine the highest future value from the given three option, but calculating the present value

will also yield similar decision as future value.

Question no 5. What initial salary would Ben need to receive to make him indifferent between

attending Wilton University and staying in his current position?

Working note:

PV (Wilton) = 3,404,251.8341

Calculating the new PV for the current job will make him indifferent.
C1 {[1 – (1 + g) / (1 + r) ^n] / (r – g)} = C2 [ 1 – [(1 + g) / (1 + r) ^n / (r – g)]

C1 {[1 – (1 + 0.03) / (1 + 0.055) ^38] / (0.055 – 0.03) = 62790 {[1 – (1 + 0.04) / (1 +

0.055) ^36] / (0.055 – 0.04)}

C1* 34.612 = 62790 * 56.58

C1 = 62790 * 56.58 / 34.612 = 102,642.3841

PV after tax that Ben should receive for him to be indifferent between attending Wilton

University and staying in his current position will be $102,642.3841 and before tax will be

$138,705.9244.

Question no 6. Suppose instead of being able to pay cash for his MBA, Ben must borrow the

money. The current borrowing rate is 5.4%. How would this affect his decision?

If Ben must borrow the money to fund his MBA program at the rate of 5.4% then it will

directly affect his decision to study MBA in different dimensions. Where the individual total cost

will amount to $157,390.89 for Wilton University and $130,218.01 for Mount Perry College.

PV of total cost of MBA @ Wilton = PMT * PVIFA 5.4%, 36

$157,390.89 = C * 15.7302

C = $10,005.65

PV of total cost of MBA @ Mount Perry = PMT * PVIFA 5.4%, 37

$130,218.01 = C * 15.8730

C = $8,234.87
Here we found that Ben needs to pay $10,005.65 monthly for Wilton University and $8,234.87

for Mount Perry College to get an MBA from respective colleges. As cost of studying MBA at

Mount Perry College is lesser than the cost of studying MBA at Wilton University. So, Ben can

make the decision on which one to study as per his ability to pay back the loan amount. And it

will be wise to compare the amount required to pay at the end of the 5th year and the NPV of the

selected teaching institution to make the decision. From the financial perspective, it will be wise

to choose the institution which has a lesser total cost i.e. Mount Perry College but for a better

future for Ben, he might opt for a teaching institution with a higher return in the future i.e.

Wilton University. But if he deems that he is satisfied with his current job then he might choose

to continue working in a money management firm.

Reference

Ross, S. A., Westerfield, R., & Jordan, B. D. (2022). Fundamentals of Corporate Finance (13th

ed.). McGraw-Hill.