CHAPTER 6
THE MBA DECISION
1. Age is obviously an important factor. The younger an individual is, the more time there is for the
2. Perhaps the most important nonquantifiable factors would be whether or not he is married and if he
has any children. With a spouse and/or children, he may be less inclined to return for an MBA since
3. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA.
Remain at current job :
His salary will grow at 3 percent per year, so the present value of his aftertax salary is:
PV = C {1 – [(1 + g) / (1 + r)]t} / (r – g)]
Wilton MBA:
Costs:
The direct costs include tuition, books and supplies, and health insurance. We need to also include
the savings in room and board as a reduction of costs.
Salary:
CHAPTER 6 C-2
His salary will grow at 4 percent per year. We must also remember that he will now only work for 36
years, so the present value of his aftertax salary is:
PV = C {1 – [(1 + g) / (1 + r)]t} / (r – g)]
Since the first salary payment will be received three years from today, so we need to discount this for
two years to find the value today, which will be:
So, the total value of a Wilton MBA is:
Mount Perry MBA :
Costs:
direct costs since they are all paid today.
Salary:
His salary will grow at 3.5 percent per year. We must also remember that he will now only work for
37 years, so the present value of his aftertax salary is:
PV = C {1 – [(1 + g)/(1 + r)]t} / (r – g)]
Since the first salary payment will be received two years from today, so we need to discount this for
one year to find the value today, which will be:
So, the total value of a Mount Perry MBA is:
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4. He is somewhat correct. Calculating the future value of each decision will result in the option with
5. To find the salary offer he would need to make the Wilton MBA as financially attractive as the
This PV will make his current job exactly equal to the Wilton MBA on a financial basis. Since his
salary will still be a growing annuity, the aftertax salary needed is:
PV = C {1 – [(1 + g) / (1 + r)]t} / (r – g)]
This is the aftertax salary. So, the pretax salary must be:
6. The cost (interest rate) of the decision depends on the riskiness of the use of funds, not the source of
