Bus 650 - Ch 4 Closing Case 1

Bus650: CH4 Closing Case 1

Bus650: CH4 Closing Case 2

An Assessment of Bus650: CH4 Closing Case

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

Age is one of the important factor that affects someone decision to continue study. The earlier you get your education the higher salary you can expect throughout your career. Although education is not required it is a fast track to success in the corporate world. In this case, Ben is now 28 years old. He graduated from college six years ago when he's age is 22 years old. Assuming that Ben had worked for the previous 5 years since graduated from college, it is expected he accumulated this money from salary saving in 5 years to do his MBA at 28 years age. If he starts the MBA program at 28 years old, he will spend two years for study and perhaps finish his MBA at 30 years old through Wilton University and possibly 29 at Mount Perry College. Assuming he still works for 40 years after receiving his MBA he will now delay retirement by 1 to 2 years, however he will have a much higher salary throughout his career with MBA.

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

There are several non quantifiable factors affect Ben's decision to get an MBA. First, Ben has to evaluate his current family situation. If he is married with or without children, this can affect Ben's decision because having to support a spouse or child will put a financial burden on his already expenses. Second, when assuming that Ben has already worked for about 5 years since graduated from college, he already has the job experiences as the MBA program usually puts a requirement to the candidates of at least having two years experiences in their respective field. The third is his willingness to continue the study. If he is eager to continue the study, he will continue the study. But if he has no willingness to study, he could do anything else, for example having jobs that would pay more or open his own business. There is no point in staying in something that you do not want to do.

3. Assuming all salaries are paid at the end of each year, what is the best option for Ben-- from a strictly financial standpoint?

I think there are three options have to be calculated:

1. Keeping his current work for 40 years

There are several factors to be considered to calculate the present values (PV) of the first options are: His annual salary at the firm is $50,000 per year, and his salary expected to increase at 3 % per year until retirement, his current average tax rate is 26 % and discount rate is 6.5 percent.

In this case, to get the present value (PV), we can use the formula of growing annuity.

Salary = $50,000, tax rate = 26%, because of tax rate, c = $37,000

R (discount rate) = 6.5%

G (growth rate) = 3%

T (the number of period working) = 40

So the PV is = $779,402.90

2. Getting the MBA at Wilton University

In this case, must compute 4 parts:

A. PV of salary for 38 years (40 - 2 years)

B. PV of signing bonus

C. PV of costs for 2 years (tuition, books and supplies, health insurance and rent fee)

D. PV of 2 years salary when he would work at the money management firm.

A. PV of salary for 38 years

The factors to consider are: 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 % per year. Because of the higher salary, his average income tax rate will increase to 31 %. Salary = $90,000, tax rate = 31%, so, C = $62,100

R (discount rate) = 6.5%

G (growth rate) = 4%

T (the number of period working) = 38

So the PV is = $1,476,759.01

B. PV of signing bonus

The factors to consider are:

Signing bonus = $ 15,000

R (discount rate) = 6.5%

T (the number of period working) = 38

So the PV is = $ 209,688.15

C. PV of cost for years ((tuition, books and supplies, health insurance and rent fee)

The factors to consider are: tuition $65,000, Books and other supplies are estimated to cost $2500 per year. Health insurance plan that will cost $3,000 per year, room and board expenses will cost $2,000.

Cost = $ 72,500 * 2 years= $145,000

R (discount rate) = 6.5%

T (the number of period studying) = 2

So the PV is = $ 263,990.83

D. PV of 2 years salary when he would work at the money management firm.

The factors to consider are: His annual salary at the firm is $50,000 per year, and his salary expected to increase at 3 % per year until retirement, his current average tax rate is 26 % and discount rate is 6.5 percent. Salary = $50,000, tax rate = 26%, because of tax rate, c = $37,000

R (discount rate) = 6.5%

G (growth rate) = 3%

T (the number of period working) = 2

So the PV is = $68,341.82

3. Getting the MBA at Mount Perry College

In this case, must compute 4 parts:

A. PV of salary for 39 years (40 - 1 years)

B. PV of signing bonus

C. PV of costs for 2 years (tuition, books and supplies, health insurance and rent fee)

D. PV of salary for 39 years

The factors to consider are: he will receive an offer of $78,000 per year upon the graduation,. The salary at this job will increase at 3.5 % per year. His average tax rate at this level of income will be 29

%. Salary = $ 78,000,