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4 Lexy Halliday graduated four years ago with degrees in accounting and finance. She has been employed in the finance 5 department at Thorvaldsen Conglomerated (TC) since graduation. She is satisfied with her current job, but is 5considering an MBA degree to increase her skills and her advancement prospects. She has examined a number of MBA schools. She has narrowed her choices to 1) staying in her current job, 2) getting an MBA at Arrington University (AU) or 3) getting an MBA at Boyden College (BC). Lexy's annual salary at TC is $70,000 per year and she expects it to increase at 3.5 percent per year until retirement. She is currently 26 years old and plans to retire in 30 years. Her current job includes a fully paid health insurance plan and her current average tax rate is 22 percent. Lexy has a savings account with enough money to cover the entire cost of her MBA program. The Mason College of Business at Arrington University is a top MBA program. An AU MBA degree requires two years of full-time enrollment. Annual tuition is $60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Lexy expects that after graduation from AU, she will receive a job offer for about $100,000 per year, with a $20,000 signing bonus. She expects the salary at this job to increase at about 4.5 percent per year. Because of the higher salary, her average income tax rate will increase to 30 percent. The Jensen School of Business at Boyden College (BC) began its MBA program 16 years ago. The Jensen School is smaller and less well known than the school at AU. BC offers an accelerated, one-year program, with a tuition cost of $50,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,000. Lexy expects to receive an offer of $85,000 per year with a $10,000 signing bonus after graduation from BC. The salary at this job is expected to increase at 4% per year and her average income tax rate at this level of income is expected to be 25 percent. Assume that once Lexy makes her decision she will immediately begin school. She will need to move and her health insurance and living expenses will change. Both schools offer a health insurance plan that will cost $6,000 per year paya ble at the beginning of the year. Moving expenses are $2,000 and Lexy estimates that room and board expenses for either school will cost $5,000 more per year than her current living expenses, payable at the beginning of the year. Lexy estimates that the appropriate discount rate for her analysis is 7.1 percent. Assume that all salaries are paid at the end of each year. 1A. How does Lexy's age affect her decision to get an MBA? D E 1B. Assuming all salaries are paid at the end of each year, what is the best option for Lexy-from a strictly financial standpoint? She has three choices: remain at her current job, pursue an Arrington MBA, or pursue a Boyden MBA. In order to determine the best option, you will need to calculate the after tax present value of each option (perform analysis below). Remain at Current Job Which option should she choose? After-tax salary: Discount rate: Growth rate: # of periods PVof remaining at current job Arrington MBA Direct Costs Present Value of Direct Costs YR 2 YR 1 Plus "gain" from getting an MBA Aftertax bonus PV of after-tax bonus After tax salary PV of new salary Note here the assumptions used for PV of new Salary: 1st calculate the PV of new salary to be received 3 years from now (which is FV of PV of new salary today) Discount rate Growth rate A 26 Discount rate 27 Growth rate 28 Number of periods 29 FV in 2 yrs of getting salary in 3 yrs 30 31 32 Total Value of a Arrington MBA = 33 34 Boyden MBA 35 Direct Costs= 86 Present Value of Direct Costs = 7 8 Plus "gain" from getting an MBA 9 Aftertax bonus 0 PV of after-tax bonus 1After tax salary 2 PV of new salary Note here the assumptions used for PV of new Salary: *1st calculate the PV of new salary to be received 2 years from now (which is FV of PV of new salary today) Discount rate Growth rate Number of periods FV in 1 yr of getting salary in 2 yrs Total Value ofa Boyden MBA = A D G 1C. In choosing between the two schools, Lexy believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement? 1D. What initial salary would Lexy need to receive after graduating from Boyden College to make her indifferent between attending Boyden College and staying in her current position? Assume her tax rate after graduating from Boyden College will be 25 percent regardless of her income level. PV of Current Job = PV of Costs to attend Boyden = PV = C PV of bonus = Equal to PV of salary required Calculate the PV of the salary required 1 yr from now when she graduates: Calculate the first salary payment (hint: use formula shown above) After tax salary Pretax salary E G Salary Timeline Arrington MBA Boyden MBA Timeline Timeline Year Cash Flow Present Value Cash flow Present Value Cash Flow Present Value 6 7 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1D Timeline for Growing Annuity 1C 1B 1A Case Information