Bus 650 - Managerial Finance

Chapter 4 Closing Case

BUS 650: Managerial Finance

Instructor: Kathryn Armstrong

17 September 2012

According to the MBA Decision case study, it looks like Ben has 40 more years before he can consider retiring. He currently works for East coast Yachts making 50,000 per year. His dilemma lies on whether he should keep working in his current position making his current salary at 3% increase in salary a year or if he should pursue his MBA and use his current savings to pay for the degree program. He narrowed his options down to two institutions, each with their own pros and cons.

If he were to earn his MBA from the Ritter College of Business he could increase his salary to 90,000 a year with a 4% increase in salary a year and a $15,000 a year signing bonus. He has to take into account that cost of tuition at this institution costs $65,000 a year (2 year education).

The third choice would be choosing a smaller, less known college to earn his graduate degree. The Bradley School of Business is an accelerated program that would set Ben back $75,000 a year, but would yield a return of $78,000 yearly salary with a 12,000 signing bonus. In Ben's case, his age plays an important role in the decision to pursue his MBA or not.. The younger an individual is, the more time there is for the increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary. Ben will have to equate his current tax rate compared to the possible increase in tax rate to formulate a valid and reasonable decision.

2. Perhaps the most important non quantifiable factors would be whether or not he is married and if he has any children. With a spouse and/or children, he may be less inclined to return for an MBA (especially full-time) since his family may be less amenable to the time and money constraints imposed by classes. Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary.

3. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. We need to find the aftertax value of each, so:

Remain at current job:

Aftertax salary = $50,000(1 - .26) = $40,700

His salary will grow at 3 percent per year, so the present value of his aftertax salary is:

PV = C

PV = $857,343.20

Wilton MBA:

The direct costs of attending Wilton are the costs of tuition, books and other supplies, health insurance costs, and the increased room and board expenses. The present value of the direct costs are:

PV of direct expenses = ($65,000 + 2,500 + 3,000 + 2,000)

+ ($65,000 + 2,500 + 3,000 + 2,500) / 1.065

PV of direct costs = $140,575.12

I also need to account for his lost salary, an opportunity cost, which is:

PV of lost salary = $40,700 / (1.065) + $40,700(1 + .03) / (1 + .065)2 = $75,176.00

The gain is the present value of his future salary, plus bonus, which is:

PV of aftertax bonus paid in 2 years = $20,000(1 - .31) / 1.0652 = $12,166.90

Aftertax salary = $100,000(1 - .31) = $69,000

His salary will grow at 4 percent per year. We must also remember that he will now only work for 38 years, so the present value of his aftertax salary