I need help with only number 3, 4, 5, 6 please. I already figured out the answers to number 1, 2 and 6. Thanks.
THE MBA DECISION
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 an investment banker. He
feels that a MBA degree would allow him to achieve this 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
Ben currently works at the money management firm of Dewey and Louis. His annual salary
at the firm is $50,000 per year, and his salary is expected to increase at 3 percent per year until
retirement. He is currently 28 years old and expects to work for 35 more years. His current job
includes a fully paid health insurance plan, and his current average tax rate is 26 percent. 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
$60,000, payable at the beginning of each school year. Books and other supplies are estimated to cost
$2,500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about
$95,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per
year. Because of the higher salary, his average income tax rate will increase to 31 percent.
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 the 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 $78,000
per year upon graduation, with a $10,000 signing bonus. His average tax rate at this level of income
will be 29 percent.
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 $20,000 per year at both
schools. The appropriate discount rate is 6.5 percent.
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. 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?
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?
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