Finance Problem: Ben Bates and his MBA
Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become and investment banker. He feels that a MBA degree would allow him to achieve his goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program.
Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $55,000 per year, and his salary is expected to increase at 3% per year until retirement. He is currently 28 years old and expects to work for 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26%. Ben has a savings account with enough money to cover the entire cost of his MBA program.
The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $65,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $100,000 per year with a $20,000 signing bonus. The salary at this job will increase at 4% per year. Because of the higher salary, his average income tax rate will increase to 31%.
The Bradley School of Business at Mount Perry College began its MBA program 16 years ago The Bradley School is smaller and less well known than Ritter College. Bradley offers an accelerated, one year program, with a tuition cost of 75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Ben thinks that he will receive an offer of $88,000 per year upon graduation, with a $16,000 signing bonus. The salary at this job will increase 3.5% per year. His average tax rate at this level of income will be 29%.
Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $2,000 per year at both schools. The appropriate discount rate is 6.5%. Assume all salaries are paid at the end of the year.
Working Wilton Mount Perry
$55,000 $100,000, $88,000
Expected increase: 4% 3.5%
Work: 35 years
Tax Rates 26% 31%
Annual tuition $65,000 $75,000
Books and other supplies: $2,500 $3,500
Programs: 2 years 1 year
Signing Bonus: $20,000 $16,000
Health Insurance: $3,000 $3,000
Room and board: $2000/yr $2,000
1. How does Ben's age affect his decision to get an MBA?
2. What other, perhaps nonquantifiable factors, affect Ben's decision to get an MBA?
3. Assuming all salaries are paid at the end of each year, what is the best option for Ben, from a strictly financial standpoint?
4. In choosing between the two schools, Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position? Assume his tax rate after graduating from Wilton University will be 31 percent regardless of his income level.
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 to get an MBA?
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