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The MBA Decision

Ben Bates is considering pursuing an MBA to become an investment banker. He has narrowed his options to Wilton University or Mount Perry College. Wilton's program is two years and costs $70,000 in tuition annually, while Mount Perry's accelerated one-year program costs $85,000. Financially, getting an MBA from Wilton provides the highest net present value of future cash flows compared to the other options. However, non-financial factors like career goals and the specific program may also affect Ben's decision.

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maria clara drzeviechi silva
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86 views

The MBA Decision

Ben Bates is considering pursuing an MBA to become an investment banker. He has narrowed his options to Wilton University or Mount Perry College. Wilton's program is two years and costs $70,000 in tuition annually, while Mount Perry's accelerated one-year program costs $85,000. Financially, getting an MBA from Wilton provides the highest net present value of future cash flows compared to the other options. However, non-financial factors like career goals and the specific program may also affect Ben's decision.

Uploaded by

maria clara drzeviechi silva
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Advanced Topics in Corporate Finance August 23rd, 2021

Name: Maria Clara Drzeviechi Silva

Mini Case: THE MBA DECISION


Ben Bates graduated from college six years ago with a finance undergraduate 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 University or Mount Perry College. 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 the money management firm of Dewey and Louis. His annual salary at
the firm is $65,000 per year, and his salary is expected to increase at 3 percent per year until
retirement. He is currently 28 years old and expects to work for 40 more years. His current job
includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben
has a savings account with enough money to cover the entire cost of his MBA program.

The Ritter College of Business at Wilton University is one of the top MBA programs in the
country. The MBA degree requires two years of full-time enrollment at the university. The
annual tuition is $70,000, payable at the beginning of each school year. Books and other
supplies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton,
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 percent per year. Because of the higher salary, his average
income tax rate will increase to 31 percent.

The Bradley School of Business at Mount Perry College began its MBA program 16 years ago.
The Bradley School is smaller and less well known than the Ritter College. Bradley offers an
accelerated, one-year program, with a tuition cost of $85,000 to be paid upon matriculation.
Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will
receive an offer of $92,000 per year upon graduation, with an $18,000 signing bonus. The
salary at this job will increase at 3.5 percent per year. His average tax rate at this level of
income will be 29 percent.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the
beginning of the year. Ben also estimates that room and board expenses will cost $2,000 more
per year at both schools than his current expenses, payable at the beginning of each year. The
appropriate discount rate is 6.5 percent.

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


2. What other, perhaps nonquantifiable 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 for 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 initial salary would Ben need to receive to make him indifferent between attending
Wilton University and staying in his current position?
6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The
current borrowing rate is 5.4 percent. How would this affect his decision?
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Advanced Topics in Corporate Finance August 23rd, 2021

Input Data:

3. From a strictly financial standpoint, the best option is the MBA at Ritter College of Business at
Wilton University, because the net present value of all future cash flows is higher comparing to
the other MBA and his actual job.

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Advanced Topics in Corporate Finance August 23rd, 2021

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