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Chapter 6 The MBA Decision Input area: Current salary Years until retirement Salary increase Tax rate $55,000 38 3% 26% Wilton Tuition per year Books...

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 an 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 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 percent per year until retirement. He is currently 28 years old and expects to work for 38 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 $ 63,000, 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 $ 98,000 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 $ 80,000 to be paid upon matriculation. Books and other sup-plies for the program are expected to cost $ 3,500. Ben thinks that he will receive an offer of $ 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. 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.

Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint?
Chapter 6 The MBA Decision Input area: Current salary $55,000 Years until retirement 38 Salary increase 3% Tax rate 26% Wilton Tuition per year $63,000 Books & Supplies $2,500 Signing bonus $15,000 Starting salary $98,000 Salary increase 4% Tax rate 31% Mount Perry Tuition per year $80,000 Books & Supplies $3,500 Signing bonus $10,000 Starting salary $81,000 Salary increase 3.5% Tax rate 29% Both schools Room & board $20,000 Health insurance $3,000 Discount rate 6.50% Question: Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint Output area: Question 3: 3. Current job Aftertax income $40,700.00 Present value of salary Wilton MBA PV of tuition & expenses PV of lost salary Aftertax bonus PV of bonus Aftertax salary PV of salary in two years Value of salary today PV of attending Wilton Mount Perry MBA PV of tuition & expenses PV of lost salary PV of signing bonus Aftertax salary PV of salary in one year PV of salary today PV of attending Mt. Perry Answer: Question: Current job PV minus bonus after Wilton costs Aftertax beginning salary Pretax beginning salary Question: Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?
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This question was asked on May 22, 2010.

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