Manoj Kumar Sahu <uemf14006@stu.ximb.ac.

in>,
Sachindra Saxena <uemf14008@stu.ximb.ac.in>,
Sidheswar Mishra <uemf14013@stu.ximb.ac.in>,
Ketan Mahapatra <uemf14010@stu.ximb.ac.in>
Dhrutiman Mishra <uemf14005@stu.ximb.ac.in>
Current Salary Rate of increase (g%) Tax rate (%)
6,547.62 3 26
Tenure of Job (yrs) Discount Rate (r)
38 6.5
Education Cost Per Year (Payable at beginning of the year)
Tuiton Fees (7,500.00)
Books & Supplies (297.62)
HIP (357.14)
Boarding expenses (2,380.95)
Total (10,535.71)
Income Per Year (Payable at end of the year)
Expected Salary Rate of increase (g%) Tax rate (%)
11,666.67 4 31
Tenure of Job (yrs) Discount Rate (r)
36 6.5
Joining Bonus (Only for the 1st year, payable at the beginning of the year)
1785.714286
Education Cost Per Year (Payable at beginning of the year)
Tuiton Fees (9,523.81)
Books & Supplies (416.67)
HIP (357.14)
Scenario 3
Ben undertakes 1-year MBA program at Mount Perry College and then joins a new Job
MBA Decision
Scenario 2
Ben undertakes 2-year MBA program at Wilton university and then joins a new Job
Scenario 1
Ben continues his Job
PV of the annuity series at time period 0 (PV0= c*PVIF)
PV of Year 1 Education expense at timeperiod 0 (= Year1 expense)
Total of All PVs (Education PV + Salary PV)
PV of the annuity series at time period 2 (PV2= c*PVIF + Joining Bonus)
PV of the annuity series at time period 0 (PV0 = PV2/(1+r)^2)
PV of total Educational expense at timeperiod 0 (PV0 = PV1 + PV2)
PV of Year 2 Education expense at timeperiod 0 (= Year2 expense/(1+r))
Boarding expenses (2,380.95)
Total (12,678.57)
Income Per Year (Payable at end of the year)
Expected Salary Rate of increase (g%) Tax rate (%)
9,642.86 3.5 29
Tenure of Job (yrs) Discount Rate (r)
37 6.5
Joining Bonus (Only for the 1st year, payable at the beginning of the year)
1,190.48
Scenario 3
PV of the annuity series at time period 0 (PV0 = PV1/(1+r)
Total of All PVs (Education PV + Salary PV)
PV of total Educational expense at timeperiod 0 (PV0=Year1 expense)
PV of the annuity series at time period 1 (PV1= c*PVIF + Joining Bonus)
CASH FLOWS
0.119047619 PRESENT VALUE
Submitted By
Dhrutiman Mishra
(#14005)
Net Income Per Year (c) Sachindra Saxena (#14008)
4,845.24 Manoj Ku. Sahu (#14006)
Ketan Mohapatra (#14010)
PVIF Siddeswar Mishra (#14013)
20.54612629991740
99,550.87
(10,535.71)
(9,892.69)
(20,428.40)
Net Income Per Year (c)
8,050.00
PVIF
22.99117447589410
Net Bonus
1232.142857
186,311.10
164,262.91
143,834.50
Boarding & Books/Supplies expenses are
Ben undertakes 1-year MBA program at Mount Perry College and then joins a new Job
Matriculation means beginning of the year
Assumptions
payable at beginning of the year
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
CashFlow Multiplier for our group
MBA Decision
Ben undertakes 2-year MBA program at Wilton university and then joins a new Job
Assumptions
Boarding & Books/Supplies expenses are
payable at beginning of the year
Tax rate is constant for rest of his job period
Salary is paid at the end of each year
Joining bonus is paid at the beginning of the year
Ben continues his Job
Assumptions
Tax rate is constant for rest of his job period
Salary is paid at the end of each year
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
(12,678.57)
Net Income Per Year (c)
6,846.43
PVIF
21.75259630373180
Net Bonus
845.24
149,772.83
140,631.77
127,953.20
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
Tax rate is constant for rest of his job period
Salary is paid at the end of each year
Joining bonus is paid at the beginning of the year
Sachindra Saxena (#14008)
Manoj Ku. Sahu (#14006)
Ketan Mohapatra (#14010)
Siddeswar Mishra (#14013)
Question 1 How does Ben's age affect his decision to get an MBA?
Answer Curently Ben is 28 yrs old and expects to work for another 38 more years.
According to the comparision of his Present values for the 3 scenarios, he will
be more motivated to go for an MBA now because he finds substantial
financial benifit between doing and not doing an MBA at this age.
At age 28:
Present value of continuing Job =
Present value of doing 2 yr MBA =
Present value of doing 1 yr MBA =
Lets say he decides to do the MBA when he is 38 yrs old with other inputs
remaining same. In this case, the benefit will not be as much as compared to
the earlier case.
At age 38:
Present value of continuing Job =
Present value of doing 2 yr MBA =
Present value of doing 1 yr MBA =
Question 2
What other, perhaps nonquantifiable, factors affect Ben's decision to get an
MBA?
Answer
Below are some of the factors which can't be measured (non-quantifiable) and
could affect Ben's decision to get an MBA
i) Reptation of the college/university - Its mentioned that Bradley school
(Mount Perry) is smaller and less know than the Ritter college (Wilton
university).
ii) Ben wanted to do an MBA
iii)Strictly going as the Case problem the Reputation of the universities will
affect his decision
Benefit in doing MBA
over continuing job
99,550.87 -
143,834.50 44,283.63
127,953.20 28,402.32
84,122.80 -
111,466.85 27,344.05
103,330.54 19,207.74
Question 3
Assuming all salaries are paid at the end of each year, what is the best option
for Ben from strictly financial standpoint?
Answer
The Present values of Ben's 3 options is calculated in the first tab. Hence from a
financial standpoint Ben's best option would be to undertake the 2 year MBA
from Wilton university as he would get the maximum time value of money at
the end of his job career by doing so.
Present value of continuing Job = 99,550.87
Present value of doing 2 yr MBA = 143,834.50
Present value of doing 1 yr MBA = 127,953.20
Question 4
Ben believes that the appropriate analysis is to calculate the future value of
each option. How would you evaluate this statement?
Answer
Ben's belief that the Future value analysis of the options will be the most
appropriate to do is not necessarily true.
The way the timeline for all the 3 options has been started from the same
starting point (Age 28 = timeperiod 0) in the first tab will not make any
difference whether Present value or Future value analysis is used to derive at
the conclusion.
Future value of continuing Job = 1,089,758.27
Present value of doing 2 yr MBA = 1,574,519.99
Present value of doing 1 yr MBA = 1,400,671.34
As we see above, like Present value, the Future value of the 2 yr MBA option
is also the highest among all the 3 options. So Ben can take his decision either
based on Present or Future value analysis.
Question 5
What initial salary would Ben need to receive to make him indifferent between attending
Wilton university and staying in his current position?
Answer
In order to make Ben indifferent between attending Wilton university and staying in his
current position, Present values of both the options should be same and we need to find
out how much will his Initial salary be when he joins his new job after his 2 yr MBA.
PV of continuing job = PV of 2 yr MBA with 'X' as initial salary
99,550.87 = Education PV + Salary PV wth initial salary 'X'
99,550.87 = (20,428.40) + [(X*PVIF)+Net Joining Bonus]/(1+r)^2
[(X*PVIF)+Net Joining Bonus]/(1+r)^2 = 99,550.87 + 20,428.40 = 1,19,979.27
X*22.9911744758941 = [1,19,979.27 * (1 + 0.65)^2] - 1232.14285714286
Therefore, X =
So salary (including tax) will be
Hence an initial salary of $7,684 (as opposed to $11,667 ) will make Ben indifferent
between attending Wilton university and continuing his current position.
5,865.35
7,683.61
Question 6
Answer
Ben continues his Job
Current Salary Rate of increase (g%)
6,547.62 3
Tenure of Job (yrs)
38
Ben undertakes 2-year MBA program at Wilton university and then joins a new Job
Education Cost Per Year (Payable at beginning of the year)
Tuiton Fees
Books & Supplies
HIP
Boarding expenses
Total
Income Per Year (Payable at end of the year)
Expected Salary Rate of increase (g%)
11,666.67 4
Tenure of Job (yrs)
36
Joining Bonus (Only for the 1st year, payable at the beginning of the year)
1785.714286
Ben undertakes 1-year MBA program at Mount Perry College and then joins a new Job
Scenario 1
PV of the annuity series at time period 0 (PV0= c*PVIF)
Scenario 2
PV of Year 1 Education expense at timeperiod 0 (= Year1 expense)
PV of Year 2 Education expense at timeperiod 0 (= Year2 expense/(1+r))
PV of total Educational expense at timeperiod 0 (PV0 = PV1 + PV2)
PV of the annuity series at time period 2 (PV2= c*PVIF + Joining Bonus)
Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4%. How would this affect
his decision?
If Ben borrows money for his education @ 5.4% then his required rate of return should be atleast 5.4%. That means that the new discount rate
will be also 5.4%.
We change the 'r' below and re-calculate the PVs for all the scenarios again.
PV of the annuity series at time period 0 (PV0 = PV2/(1+r)^2)
Total of All PVs (Education PV + Salary PV)
Scenario 3
Education Cost Per Year (Payable at beginning of the year)
Tuiton Fees
Books & Supplies
HIP
Boarding expenses
Total
Income Per Year (Payable at end of the year)
Expected Salary Rate of increase (g%)
9,642.86 3.5
Tenure of Job (yrs)
37
Joining Bonus (Only for the 1st year, payable at the beginning of the year)
1,190.48
PV of total Educational expense at timeperiod 0 (PV0=Year1 expense)
Hence, borrowing money will not change his decision because still the Present value of the 2 yr MBA is the highest among PVs all the
scenarions at 5.4% rate of borrowing. However, Ben's present value for the 3 options has gone up in case of borrowing compared to if he
spends his own money for education.
PV of the annuity series at time period 0 (PV0 = PV1/(1+r)
Total of All PVs (Education PV + Salary PV)
Scenario 3
PV of the annuity series at time period 1 (PV1= c*PVIF + Joining Bonus)
Tax rate (%) Net Income Per Year (c)
26 4,845.24
Discount Rate (r) PVIF
5.4 24.30225458198480
117,750.21
Ben undertakes 2-year MBA program at Wilton university and then joins a new Job
Education Cost Per Year (Payable at beginning of the year)
(7,500.00)
(297.62)
(357.14)
(2,380.95)
(10,535.71)
(10,535.71)
(9,995.93)
(20,531.65)
Tax rate (%) Net Income Per Year (c)
31 8,050.00
Discount Rate (r) PVIF
5.4 27.29082172700510
Joining Bonus (Only for the 1st year, payable at the beginning of the year) Net Bonus
1232.142857
220,923.26
198,865.85
178,334.20
Ben undertakes 1-year MBA program at Mount Perry College and then joins a new Job
PV of the annuity series at time period 0 (PV0= c*PVIF)
PV of Year 1 Education expense at timeperiod 0 (= Year1 expense)
PV of Year 2 Education expense at timeperiod 0 (= Year2 expense/(1+r))
PV of total Educational expense at timeperiod 0 (PV0 = PV1 + PV2)
PV of the annuity series at time period 2 (PV2= c*PVIF + Joining Bonus)
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4%. How would this affect
his decision?
If Ben borrows money for his education @ 5.4% then his required rate of return should be atleast 5.4%. That means that the new discount rate
will be also 5.4%.
We change the 'r' below and re-calculate the PVs for all the scenarios again.
PV of the annuity series at time period 0 (PV0 = PV2/(1+r)^2)
Total of All PVs (Education PV + Salary PV)
Education Cost Per Year (Payable at beginning of the year)
(9,523.81)
(416.67)
(357.14)
(2,380.95)
(12,678.57)
(12,678.57)
Tax rate (%) Net Income Per Year (c)
29 6,846.43
Discount Rate (r) PVIF
5.4 25.78204578445320
Joining Bonus (Only for the 1st year, payable at the beginning of the year) Net Bonus
845.24
177,360.17
168,273.41
155,594.84
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
PV of total Educational expense at timeperiod 0 (PV0=Year1 expense)
Hence, borrowing money will not change his decision because still the Present value of the 2 yr MBA is the highest among PVs all the
scenarions at 5.4% rate of borrowing. However, Ben's present value for the 3 options has gone up in case of borrowing compared to if he
spends his own money for education.
PV of the annuity series at time period 0 (PV0 = PV1/(1+r)
Total of All PVs (Education PV + Salary PV)
PV of the annuity series at time period 1 (PV1= c*PVIF + Joining Bonus)
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]
Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]