Nhu Quynh Truong
Dr. Thapa
Finance 438
December 2, 2011
The MBA Decision
1. How does Bens age affect his decision to get an MBA?
When making decision for getting an MBA degree, Age is an important factor that needs
to consider. The younger an individual is, the more time there is for the increased salary to offset
the cost of the decision to return to school for an MBA. The cost includes both the explicit costs
such as tuition, as well as the opportunity cost of the lost salary.
2. What other, perhaps non-quantifiable factors affect Bens decision to get an MBA?
A non-quantifiable factors affect Bens decision to get an MBA would be whether he is
married and has any children or not. If Ben is married and has children, he may be unwilling to
return for an MBA program since his family is not affordable to have money and time for him to
return to school. Other factors would be include his willingness and desire to pursue an MBA
program such as job satisfaction and the important of a job is to him regardless of the salary.
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben---from a
strictly financial standpoint?
He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt.
Perry MBA. The value of his current job is $935,283.49. If Ben decides to attend MBA program
at Wilton University, the values of his decision will be $1,384,398.76. Other solution is that Ben
will choose to attend MBA program at Mount College. The value of his decision for choosing
Mount College is $1,254,421.56. Therefore, Ben should choose the MBA program at Wilton
University because it will give him the most values. A detail analysis is on a separate paper. (See
spreadsheet).
4. Ben believes that the appropriate analysis is to calculate the future value of each option. How
would you evaluate this statement?
I think Ben is somewhat correct. Calculating the future value of each decision will result
in the option with the highest present value having the highest future value. Therefore, a future
value will analysis result in the same decision. However, Bens statement that a future value
analysis is the correct method is wrong because present value analysis is also give the correct
answer as well.
5. What initial salary would Ben need to receive to make him indifferent between attending
Wilton University and staying in his current position?
First, finding the necessary PV to make indifferent between Bens current salary and the
salary after he gets the MBA degree at Wilton University, add the costs of attending Wilton, and
the PV of the after-tax bonus. The necessary PV will be:
$935,283.49 = -137,089.20 82,010.18 + 12,166.90 + necessary PV
$935,283.49 = -206,932.48 + necessary PV of salary
$935,283.49 + 206,932.48 = necessary PV of salary
$1,142,215.96 = necessary PV of salary
This PV will make his current job exactly equal to the Wilton MBA on a financial basis. Since
the salary will not start for 3 years, we need to find the value in 2 years so that it is the PV of
growing annuity. So:
Value in 2 years = $1,142,215.96 X (1.0652) = $1,295,529.90
Because his salary will be a growing annuity with a 4% growth every year, the after-tax salary
needed is:
PV = C {[1/(r g)] [1/(r g)] [(1 + g)/(1 + r)]t}
$1,295,529.90 = C {[1 / (.065 .04)] [1 / (.065 .04)] X [(1 + .04) / (1 + .065)] ^38}
$1,295,529.90 = C X 23.78
$1,295,529.90 / 23.78 = C
$54,479.04 = C after-tax salary
This is the after-tax salary. Therefore, the pretax salary must be:
Pretax salary = $54,479.04 / (1 .31)
Pretax salary = $78,955.12
Bens initial salary would need to receive $78,955.12 to make him indifferent between attending
Wilton University and staying in his current position.
6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The
current borrowing rate is 5.4 percent. How would this affect his decision?
The cost of the decision is depending on the riskiness of the use of funds, not the source of
the funds. Therefore, whether he can pay cash or must borrow is irrelevant and does not affect
his decision.