BAFI 355 – Case Study #2 – The MBA Decision

Group Project
Due on Monday, October 25, 2010 in a WORD/EXCEL Format

Ben Gates, 28 years old and single, graduated from CWRU six (6) years ago with an undergraduate
degree in finance. He wishes to become an investment banker. He knows that he must obtain a Master
of Business Administration (“MBA”) in order to gain entry into this profession.

He has narrowed his choice of schools to Wilton University or Mount Perry College. Both schools require
that the programs be completed on a full-time basis and that all students are required to participate in
un-paid summer internships while they are attending school. Consequently, Ben will lose his current
income while he attends school.

Ben currently works at a money management firm where is annual salary is $45,000. If he stays in this
position, he expects his salary to increase at an annual rate of 4.0% until retirement. He plans on retiring
in 35 years. His current benefit package includes a full paid health insurance plan. His average tax rate
is 28%. His net worth consists of $120,000 that is invested in a money market account. He will use
these funds to finance his cost of school.

The MBA program at Wilton College is a two (2) year program. It is considered one the top 10 MBA
programs in the nation. The annual tuition is $60,000, payable at the beginning of each year. Books
and supplies are estimated to cost $3,500 per year, payable at the beginning of each year. Ben expects
that if he earns an MBA at Wilton, he will obtain a job that offers a beginning salary of $99,000 plus a
signing bonus of $15,000. The salary at this job will increase 5.00% per year. His average income tax
rate will be 34.00%.

The MBA program at Mount Perry is a one (1) year program. The tuition is $75,000 and is payable at the
beginning of the school year. Books and other supplies are expected to be $3,500, payable at the
beginning of the year. Upon graduation from Mount Perry, Ben expects to receive a job offer that pays a
beginning salary of $83,000 with a signing bonus of $10,000. The salary is expected to grow at 3.5%
per year. Ben’s average tax rate will be 30.00%.

Both schools offer a health insurance plan that will costs $3,000 per year, payable at the beginning of
each year. Ben has calculated the appropriate discount rate to be 5.5%.

QUESTIONS:

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

2. What other non-qualifiable factors may affect Ben’s decision to pursue an MBA?

3. Assuming that all salaries are paid at the end of each year, which of the three (3) options (stay in
current job, attend Wilton, or attend Mount Perry) presents Ben with the highest present value
(Use a Present Value analysis on the cash flows of each option).