Reference no: EM132739960

Mini Case of the Investment in the MBA Degree

• Cooper 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 Carnegie University or Stanford 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.
• Cooper currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $55,000 per year, (assuming zero growth of salary). 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. Cooper has a savings account with enough money to cover the entire cost of his MBA program.
• The Ritter College of Business at Carnegie 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. Cooper expects that after graduation from Carnegie, he will receive a job offer for about $98,000 at the end of per year, assuming zero growth of salary, with additional $15,000 signing bonus. Because of the higher salary, his average income tax rate will increase to 31 percent.
• The Bradley School of Business at Stanford 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 $78,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Cooper thinks that he will receive an offer of $81,000 at the end of per year upon graduation, assuming zero growth of salary, with an $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. Cooper has also found that both schools offer graduate housing. His room and board expenses will decrease by $4,000 per year at either school he attends. The appropriate discount rate is 6.5 percent based on the market and Cooper's risk attitude.

Problem 1. Cooper believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?

Problem 2. What initial salary would Cooper need to receive to make him indifferent between attending Carnegie University and staying in his current position?