Ben Bates graduated from UNIVERSITY six years ago with a degree in finance. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA would allow him to achieve this goal. He has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both institutions, to get class credit for the time, no salary can be paid. Other than this, neither institution 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 cent 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 per cent. Ben has a savings account with enough money to cover the entire cost of his MBA. The Ritter College of Business at Wilton University is one of the TOP MBA SCHOOLS in the country. The MBA degree requires two years of full-time enrolment at the university. The annual tuition fee is $63 000, payable at the beginning of each academic 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 $98 000 per year, with a $15 000 signing BONUS. The salary at this job will increase at 4 per cent per year. Because of the higher salary, his average income tax rate will increase to 31 per cent. 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 graduation. Books and other supplies for the program are expected to cost $3500. 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 per cent per year. His average tax rate at this level of income will be 29 per cent. Both institutions offer a health insurance plan that will cost $3000 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 institutions. The appropriate discount rate is 6.5 per cent.
QUESTIONS
1.Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly FINANCIAL standpoint?
2. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?
3. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 per cent. How would this affect his decision?