CHAPTER 4 CASE 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 since
his family may be less amenable to the time and money constraints imposed by classes. Other factors
would include his willingness and desire to pursue an MBA, job satisfaction, 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.
In this analysis, room and board costs are irrelevant since presumably they will be the same whether
he attends college or keeps his current job. We need to find the aftertax value of each, so:
Remain at current job :
His salary will grow at 3 percent per year, so the present value of his aftertax salary is:
Wilton MBA:
Costs:
The direct costs will occur today and in one year, and include tuition, books and supplies, health
insurance, and the room and board increase. So the total direct costs are:
The financial benefits are the bonus to be paid in 2 years and the future salary.
CHAPTER 4 CASE C-2
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:
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:
Mount Perry MBA :
The direct costs will occur today and include tuition, books and supplies, health insurance, and the
room and board increase. So the total direct costs are:
Total direct costs = $85,000 + 4,500 + 3,000 + 2,000
Total direct costs = $94,500
Note, this is also the PV of the direct costs since they are all paid today.
The financial benefits are the bonus to be paid in 1 year and the future salary.
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:
PV = C {[1 / (r – g)] – [1 / (r – g)] × [(1 + g) / (1 + r)]t}
PV = $65,320{[1 / (.063 – .035)] – [1 / (.063 – .035)] × [(1 + .035) / (1 + .063)]39}
PV = $1,509,165.86
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:
CHAPTER 4 CASE C-3
4. He is somewhat correct. Calculating the future value of each decision will result in the option with
the highest present value having the highest future value. Thus, a future value analysis will result in
5. To find the salary offer he would need to make the Wilton MBA as financially attractive as the as the
current 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. Note, this assumes that the singing bonus is constant. So, the
necessary PV to make the Wilton MBA the same as his current job will be:
This PV will make his current job exactly equal to the Wilton MBA on a financial basis. Since the
salary will not start for 3 years, we need to find the value in 2 years so that it is the present value of
growing annuity. So:
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 the funds, not the source
of the funds. Therefore, whether he can pay cash or must borrow is irrelevant. This is an important
concept which will be discussed further in capital budgeting and the cost of capital in later chapters.