Reference no: EM131064327

The MBA Decision

Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East Coast Yachts. 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 examiningschools, he has narrowed his choice to either Wilton University or Mount Perrycollege.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 itsstudents to work while enrolled in its MBA program.

Ben currently works at the money management firm of Dewey and Louis. His annualsalary at the firm is$53,000per year, and his salary expected to increase at 3 % per year until retirement. He is currently 28 years old and expects to work for 40 more years. Hiscurrent job includes a fully paid health insurance plan, and his current average tax rate is26%. Ben has a savings account with enough money to cover the entire cost of his MBA program.

The Ritter College of Business at the Wilton University is one of the top MBA programs inthe country. The MBA degree requires two years of full time enrollment at the university.The annual tuition is $58,000, payable at the beginning of each school year. Books andother supplies are estimated to cost$2500per year. Ben expects that after graduationfrom Wilton, he will receive a job offer for about$100,000per year, with a $15,000signing 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 the Mount Perry College began its MBA program 16years 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 $71,000to be paid upon matriculation. Books and other supplies for the program are expected to cost$3500. Ben thinks that he will receive an offer of $88,000per year upon the graduation,with an$12,000signing bonus. The salary at this job will increase at 3.5 % per year. Hisaverage 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 $2,000more per year at both schools than his current expenses, payable at the beginning of eachyear. The appropriate discount rate is 6.5 percent. Assume all salaries are paid at the end of each year.

Answer the following questions. Please provide original work with proper citation.

1. How does Ben's age affect his decision to get an MBA?

2. What other, perhaps non-quantifiable factors affect Ben's decision to get an MBA?

3. In choosing between two schools, Ben believes that the appropriate analysis is to calculate the future value of each option. Howwould you evaluate this statement?

4. 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 to get MBA?