The MBA Decision

Ben Bates graduated from college six years ago with a financeundergraduate degree. Although he is satisfied with his currentjob, his goal is to become an investment banker. He feels that anMBA degree would allow him to achieve this goal. After examiningschools, he has narrowed his choice to either Wilton University ofMount Perry College.   Although internships areencouraged by both schools, to get class credit for the internship,no salary can be paid. Other than internships, neither school willallow its students to work while enrolled in its MBA program.

Ben currently works at the money management firm of Dewey andLouis. His annual salary at the firm is $55,000 per year, and hissalary is expected to increase at 3 percent per year untilretirement. He is currently 28 years old and expects to work for 38more years. His current job includes a fully paid health insuranceplan, and his current average tax rate is 26%. Ben has savingsaccount with enough money to cover the entire cost of his MBAprogram.

The Ritter College of Business at Wilton University is one ofthe top MBA programs in the country. The MBA degree requires twoyears of full-time enrollment at the university. The annual tuitionis $63,000 payable at the beginning of each school year. Books andother supplies are estimated to cost $2,500 per year. Ben expectsthat after graduation from Wilton, he will receive a job offer forabout $98,000 per year, with a $15,000 signing bonus. The salary atthis job will increase at 4 percent per year. Because of the highersalary, his average income tax rate will increase to 31percent.

The Bradley School of Business at Mount Perry College began itsMBA program 16 years ago. The Bradley School is smaller and lesswell known than the Ritter College. Bradley offers an acceleratedone-year program, with a tuition cost of $80,000 to be paid uponmatriculation. Books and other supplies for the program areexpected to cost $3,500. Ben thinks that he will receive an offerof $81,000 per year upon graduation, with a $10,000 signing bonus.The salary at this job will increase at 3.5 percent per year. Hisaverage tax rate at this level of income will be 29 percent.

Both schools offer a health insurance plan that will cost $3,000per year, payable at the beginning of the year. Ben also estimatesthat room and board expenses will cost $20,000 per year at bothschools. The appropriate discount rate is 6.5 percent.

Questions

1.           How does Ben’s age affect his decision to get an MBA

2.           What other, perhaps nonquantifiable, factors affect Ben’s decisionto get an MBA?

3.           Assuming all salaries are paid at the end of each year, what is thebest option for Ben from a strictly financial standpoint?

4.           Ben believes that the appropriate analysis is to calculate thefuture value of each option. How would you evaluate thisstatement?

5.           What initial salary would Ben need to receive to make himindifferent between attending Wilton University and staying in hiscurrent position?

6.           Suppose, instead of being able to pay cash for his MBA, Ben mustborrow the money. The current borrowing rate is 5.4 percent. Howwould this affect his decision?