Quent Mikeal

BUS650: Managerial Finance

Instructor: Rick Kwan

February 22, 2013

MBA Decision

1. Age is obviously an important factor. The younger an individual is, the more time there is for the (hopefully) increased salary to offset the cost of the decision to return to school for a MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary.

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 after tax value of each, Therefore:

Remain at current job:

After tax salary = $55,000(1 – .26) = $40,700

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

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

We 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 after tax bonus paid in 2 years = $20,000(1 – .31) / 1.0652 = $12,166.90

After tax 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 after tax salary is:

PV = $1,640,843.35

Since the first salary payment will be received three years from today, so we need to discount this for two years to find the value today, which will be:

PV = $1,640,843.35 / 1.0652

PV = $1,446,664.77

So, the total value of a Wilton MBA is:

Value = –$140,575.12 – 75,160 + 12,166.90 + 1,446,664.77 = $1,246,958.48

Mount Perry MBA:

Costs:

Total direct costs = $75,000 + 3,500 + 3,000 + 2,000 = $83,500. Note, this is also the PV of the direct costs since they are all paid today.

PV of indirect costs (lost salary) = $40,700 / (1.065) = $38,215.96

Salary:

PV of after tax bonus paid in 1 year = $16,000(1 – .29) / 1.065 = $10,666.67

After- tax salary = $88,000(1 – .29) = $62,480

His salary will grow at 3.5 percent per year. We must also remember that he will now only work for 39 years, so the present value of his after tax salary is:

PV = $1,399,292.27

This is the value of his salary in one year since the first salary payment will be received two years from today. We need to discount this for one year to find the value today, which will be:

PV = $1,399,292.27 / 1.065...