CHAPTER 4 C-1
CHAPTER 4
THE MBA DECISION
1. Age is obviously an important factor. The younger an individual is, the more time there is for the
(hopefully) increased salary to offset the cost of the decision to return to school for an MBA. The cost
includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary.
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
and how important the prestige of a job is to him, regardless of the salary.
3. He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA.
We need to find the aftertax value of each, so:
Remain at current job:
Aftertax salary = $57,000(1 – .26) = $42,180
The direct costs of attending Wilton are the costs of tuition, books and other supplies, health insurance
costs, and the increased room and board expenses. The present value of the direct costs are:
PV of direct expenses = ($63,000 + 2,500 + 3,000 + 2,000)
+ ($63,000 + 2,500 + 3,000 + 2,000)/1.061
CHAPTER 4 C-2
Aftertax salary = $105,000(1 – .31) = $72,450
His salary will grow at 4 percent per year. We must also remember that he will now only work for 38
years, so the present value of his aftertax salary is:
PV = 𝐶[1 – (1 + 𝑔
1 + 𝑟)𝑡
𝑟−𝑔 ]
PV = $72,450[1 – (1 + .04
1 + .061)38
.061 – .04 ]
PV = $1,836,007.92
Since the first salary payment will be received three years from today, we need to discount this for two
years to find the value today, which will be:
Mount Perry MBA:
Costs:
Total direct costs = $75,000 + 3,500 + 3,000 + 2,000 = $83,500
Aftertax salary = $88,000(1 – .29) = $62,480
His salary will grow at 3.5 percent per year. We must also remember that he will now only work for
39 years, so the present value of his aftertax salary is:
1 + 𝑟)𝑡
This is the value of his salary in one year since the first salary payment will be received two years
from today. We need to discount this for one year to find the value today, which will be:
PV = $1,489,928.56/1.061
job, we need to take the PV of his current job, add the costs of attending Wilton, and the PV of the
bonus on an aftertax basis. So, the necessary PV to make the Wilton MBA the same as his current job
will be:
PV of salary = $1,071,013.55
This PV will make his current job exactly equal to the Wilton MBA on a financial basis. So, the present
value of the salary in two years when he graduates must be: