Case Analysis
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 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 no salary can be paid. Other than internships , neither school will allow its students to work while enrolled in the MBA program.
Ben currently works at the money management firm of Dewey and Lewis. His annual salary at the firm is $65,000 and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work 40 more years. His current job includes a fully paid health insurance plan , and his current tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of the MBA program.
The Ritter College of Business at Wilton is one of the top MBA programs in the country. The MBA Program requires two years of full-time enrollment at the university. The annual tuition is $70,000 payable at the beginning of each school year. Books and other supplies are estimated to cost $3000 per year. Ben expects after graduation from Wilton he will receive a job offer for about $110,000 per year with a $20,000 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 Ritter College. Bradley offers an accelerated one-year program , with a tuition cost of $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4500. Ben thinks he will receive an offer of $92,000 per year upon graduation, with an$18,000 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 health a health insurance plan that will cost $3000 per year, payable at the beginning of the year. Ben estimates that room and board expenses will cost $2000 more per year at both schools than his current expenses payable at the beginning of each year. The appropriate discount rate is 6.3 percent.
1. How does Ben's age affect his decision to get an MBA?
2. What other, perhaps nonquantifiable factors affects 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 analysisis to calculate the future value of each option. How would you evaluate the 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 paying cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?