THE MBA DECISION

(Part-1)

Ben Bates graduated from college six years ago with a finance undergraduate degree and
currently engaged at money management firm and satisfied with annual salary of $53,000 per
annum. He wants to become an investment banker, so he has option to continue his MBA from
Ritter College of business at Wilton University or The Bradley College of business at Mount
Perry College. As during the study Ben will not be able to continue his job but only can do
internship. There will be salary loss and other additional expenses which will incur in doing
MBA like supplies and books etc. On the other hand, due to the age factor as he can work up to a
certain age Ben’s decision of MBA will be affected by Ben’s age. Ben cannot work due to old
age so job is better option than MBA.

(Part-2)

Other Non-quantifiable factors

There could be many other factors which can influence Ben’s decision of MBA like:

 If Ben is married and will stop working than who will look after his family. Is there any other
source, through which he can support his family or his wife is working or not.
 In case if Ben has children and if they are studying, then who will borne all expenses
 There is a possibility Ben will not be satisfied with job after MBA

(Part-3)

Currently Ben has three option:

1) Present value of Current job

Annual salary = 53,000

Growth rate (g) = 3%
Tax rate = 26%
Expected years of work more (t) = 38
Discount rate (r) = 5.5%
Salary after tax = 53000*(1-0.026)
Salary after tax = 39,220

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 Formula for calculating present value = C ((1/r-g)-(1/r-g)*(1+g/1+r) ^t)
PV = 39,220 ((1/ (0.055 – 0.03))–((1/ (0.055 – 0.03))*(1.03/1.055) ^38)
PV = 39,220 (40 – 16.07982)
PV = 39,220* (23.92018)
PV = $938, 150
So, present value of current job continuing is $938,150.

2) MBA at Wilton University

Time required = 2 years
Annual tuition fees = 58000
Books and supplies cost= 2,000 per year
Health insurance cost = 3,000 per year
Signing bonus = $10,000
i) Present value of all costs = (58,000+ 2,000 + 3,000- 4,000) + ((58,000 + 2,000+
3,000))/ 1.055)

= 59,000 + (59,000/1.055)
=59,000 + 55,924
Present value of all costs = 114,924
ii) Now, present value of opportunity cost
PV = ((39,220/ 1.055) + (((39,220*(1.03))/ (1.055) ^2))
PV = 37,175 + 36,294
PV of opportunity cost = 73,470
iii) PV of bonus
PV of bonus = ($10,000(1-0.31)/ (1.055) ^2)
PV of signing bonus = $6,199
The value of after tax bonus to be paid in two years = $6,199
iv) PV of salary drawn for 36 years

Salary = $87,000
Tax rate = 31%
Growth rate = 4%
Salary after tax = $87,000*(1-0.31) = $60,030
Present value of salary = $60,030 ((1/ (0.055 – 0.04))–((1/ (0.055 –
0.04))*(1.04/1.055) ^36)
Present value of salary = $60,030 (66.66667 – 38.68852)
Present value of salary = $1,612, 050
So, Present value of salary starts payment after 3 years from today is = $1,612,
050

v) Present value of salary today after two year discount

PV = ($1,612, 050/ (1.055) ^2) = $1,448,350.53

So, total value to MBA

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 = (-$114,924- $73,470 + $6,199 + $1,448,350.53) = $1,266,155.33

So, total value of MBA at Wilton is = $1,266,155.33

3) MBA at Mount Perry

Time for degree = 1 years
Tuition cost = 75,000
Books and supplies cost = 4,200
Health insurance cost = 3000 per year

Growth rate = 3.5%

Average tax rate = 29%

i) Present value of all costs = (75,000+ 4,200+ 3000-4000)

Present value of all costs = $78,200

ii) Present value of opportunity cost
= 39,220/1.055 = $37,175

iii) Present value of bonus

= ((8000*(1-0.29))/1.055) = $5,384

iv) Present value of salary to be drawn for 37 years

After tax salary = $78000*(1-0.29) = 55,380

Present value of salary = $55,380 ((1/ (0.055 – 0.035))–((1/ (0.055 –

0.035))*(1.035/1.055) ^37)
= $55,380 (50- 24.62759)
= $1,405,123.99

v) Present value of salary today after two year discount

= $1,405,123.99/ 1.055 = $1,331,871.08

Now calculate total value of MBA = - $78,200- 37,175 + $5,384 + $1,331,871.08

Total value of MBA = $1,221,880.08

Thus,
Option 1 = $938,150

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 Option 2 = $ $1,266,155.53
Option 3 = $1,221,880.08
After evaluation all option the best option for Ben is second option, Ben should
go for MBA at Wilton University as this option has present value greater than
other two options.

(Part-4)

The present value is helpful in deciding which option is best and more profitable. The Present
value is evaluated in terms of time value of money. For instance if 1$ will be earned after one
year than this 1$ will not have the same value in today’s term. Present value and discount
factor is used to evaluate the future value of money in present term. Discount factor is
compulsory for this calculation. On other hand, under future value analysis future value of
money is calculated by using the present value of money in future terms. However, present
value and future value analysis both useful in evaluating best option. Decision under both
analysis will be same Thus, Ben’s understanding regarding is correct regarding analysis.

(Part-5)

1) Present value of Current job

Annual salary = 53,000

Growth rate (g) = 3%
Tax rate = 26%
Expected years of work more (t) = 38
Discount rate (r) = 5.5%
Salary after tax = 53000*(1-0.026)
Salary after tax = 39,220

Formula for calculating present value = C ((1/r-g)-(1/r-g)*(1+g/1+r) ^t)

PV = 39,220 ((1/ (0.055 – 0.03))–((1/ (0.055 – 0.03))*(1.03/1.055) ^38)
PV = 39,220 (40 – 16.07982)
PV = 39,220* (23.92018)
PV = $938, 150
So, present value of current job continuing is $938,150.

2) MBA at Wilton University

Time required = 2 years

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 Annual tuition fees = 58000
Books and supplies cost= 2,000 per year
Health insurance cost = 3,000 per year
Signing bonus = $10,000
i) Present value of all costs = (58,000+ 2,000 + 3,000- 4,000) + ((58,000 + 2,000+
3,000))/ 1.055)

= 59,000 + (59,000/1.055)
=59,000 + 55,924
Present value of all costs = 114,924

ii) Now, present value of opportunity cost

PV = ((39,220/ 1.055) + (((39,220*(1.03))/ (1.055) ^2))
PV = 37,175 + 36,294
PV of opportunity cost = 73,470
iii) PV of bonus
PV of bonus = ($10,000(1-0.31)/ (1.055) ^2)
PV of signing bonus = $6,199
The value of after tax bonus to be paid in two years = $6,199
iv) PV of salary drawn for 36 years

Salary = $87,000
Tax rate = 31%
Growth rate = 4%
Salary after tax = $87,000*(1-0.31) = $60,030
Present value of salary = $60,030 ((1/ (0.055 – 0.04))–((1/ (0.055 –
0.04))*(1.04/1.055) ^36)
Present value of salary = $60,030 (66.66667 – 38.68852)
Present value of salary = $1,612, 050
So, Present value of salary starts payment after 3 years from today is = $1,612,
050

v) Present value of salary today after two year discount

PV = ($1,612, 050/ (1.055) ^2) = $1,448,350.53

So, total value to MBA

= (-$114,924- $73,470 + $6,199 + $1,448,350.53) = $1,266,155.33

So, total value of MBA at Wilton is = $1,266,155.33

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 The present value of Wilton MBA should be made equal to the present value of his current job,
so,

PV= ($938,150 + $114,924 + $73,470 - $6,199) = $1,120,345.00

Ben will receive salary after three years. We need to find the value in two years so present value
of growing annuity is:

PV in two years = $1,120,345.00 *(1.055) ^2 = $1,246,971.99

Calculation of Initial salary to be drawn:

PVA= C ((1/r-g)-(1/r-g)*(1+g/1+r) ^t)

$1,246,971.99 = C*((1/ (0.055 – 0.03))–((1/ (0.055 – 0.03))*(1.03/1.055) ^38)

$1,246,971.99 =C*(40 – 16.07982)
$1,246,971.99 = C*23.92018

($1,246,971.99/ 23.29018)= C

C = $53,540.68 Salary after tax

Now we will calculate pre-tax salary:

Pre-tax salary = ($53,540.68 / (1-0.26)) = $72,352.27

However, the initial salary Ben would Ben need to receive to make him indifferent between
attending Walton university and staying in his current position is $72,352.27.

(Part-6)

As in this case ben has two options either to go with Wilton or Mount Perry for MBA and for this
the cost incur on getting the MBA degree has to be paid by Ben. Whether, he would pay cash or
borrow money for these costs. If Ben will borrow money for paying all costs instead of cash then
the borrowing interest rate would be 5.4%. This interest rate will not affect the decision of MBA
in case Ben borrow money from bank. The decision could be affected by the risks factors
involved in investing fund not the interest rates. As Ben has enough money to cover the entire
program of MBA. This decision of borrowing will change the situation financially. He should
consider if he would have to borrow money than whether he would be able to clear loans

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 payment with due time. These factors he should consider for deciding in case of borrowing loan.
MBA decision is not affected by the interest rates of loan.

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