The Mba Decision

1594 words 7 pages
Mini Case - The MBA Decision

1. How does Ben’s age affect his decision to get an MBA?
Ben’s age is a very important factor which can affect his decision to get an MBA degree.

Firstly, Ben is now 28 years old and expects to work for 40 more years. So he has an expected work life of 68 years. So the earlier he gets an MBA, the better for him. For example: probably it won’t benefit him much if he decided to get an MBA at the age of 60. No one would hire him as an investment banker even if he had an MBA that time.

Secondly, getting an MBA degree will cost Ben a lot of money. Currently at the age of 28, he already has a job experience of around 6 years. This job allowed Ben to have a savings account with enough money to cover the entire
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bonus of $20,000 at the end of year 2 * Salary = $110,000 x (1 – 31%) = $75,900 [after 31% tax deduction]
Expected to increase at 4% per year
Appropriate discount rate = 6.5%
Working years left = 38
Hence, PV of Cash Inflow = ($20,000 + $75,9001-1+4%1+6.5%386.5%-4% ) / (1.065)2 = $1,608,964 * Cash Outflow:

* Annual Tuition = $65,000
Books and other supplies per year = $3,000
Health insurance plan per year = $3,000
Room and board expenses per year = $2000 (delta)
Total cost per year = $73,000 Hence PV of Cash outflow (annuity due) = $73,000 1-11+6.5%26.5% (1+6.5%) = $141,544 Hence NPV = $1,608,964 - $141,544 = $1,467,720 iii) Getting MBA from Mount Perry College * Cash Inflow:

* Signing bonus of $18,000 at the end of year 1 * Salary = $92,000 x (1 – 29%) = $65,320 [after 29% tax deduction]
Expected to increase at 3.5% per year
Appropriate discount rate = 6.5%
Working years left = 39
Hence, PV of Cash Inflow = ($18,000 + $65,3201-1+3.5%1+6.5%396.5%-3.5% ) / (1.065) = $1,390,513 * Cash Outflow:

* Annual Tuition = $80,000
Books and other supplies = $4,500
Health insurance plan = $3,000
Room and board expenses = $2000 (delta)
Total cost = $89,500 Hence PV of Cash outflow = $89,500 Hence NPV = $1,390,513 - $89,500 = $1,301,013
Question # 5
We need to solve for ‘Y’ where:
($20,000 + Y * (1-31%)1-1+4%1+6.5%386.5%-4% ) / (1.065)2 - $141,544 = $935,283 * Y * (1-31%) 1-1+4%1+6.5%386.5%-4% = ($935,283 + $141,544) * (1.065)2 - $20,000 * Y *

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