FIN – Ben Bates graduated from college six years ago

| October 3, 2018

Ben Bates graduated from college six years ago with a finance undergrad 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 Wilton or Mount Perry. 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. Ben currently works at Dewey and Lewis and makes $53,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is 28 years old, and expects to work for 38 more years. He has fully paid health insurance and his tax rate is 26 percent. Ben has savings with enough money to pay for his MBA. Wilton is one of the top MBA programs. The MBA requires two years of full-time enrollment, annual tuition is $58,000 per year. Books and supplies are $2,000 per year. Ben expects that after he graduates, he would make $87,000 per year with a $10,000 signing bonus., His salary would increase 4% per year – although his tax rate would then be 31%. Mount Perry offers an accelerated one-year programm for $75,000. Books and supplies are $4,200. Ben thinks he would make $78,000 per year with this degree with an $8,000 signing bonus. His salary after graduation would increase at 3.5% per year, and tax rate would be 29%. Both schools offer health insurance for $3000 per year. Room and board for Ben will decrease by $4000 per year for either school., The discount rate is 6.5%.1) How does Ben’s age affect his decision to get an MBA?2) What other, perhaps noquantifiable factors affect Ben’s decision to get an MBA?3) Assuming all salaries are paid at the end of each year, what is the best option to Ben from a strictly financial standpoint?4) Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?5) What intial salary would Ben need to receive to make him indifferent between attending Wilson and staying at his current job?6) Suppose, instead of being able to pay cash for his MBA, Ben must borrow money. The current borrowing rate is 5.4%. How would this affect his decision.

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