CHAPTER 4
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 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
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:
Aftertax salary = $65,000(1 – .26)
+ ($70,000 + 3,000 + 3,000 + 2,000)/1.047
PV of direct expenses = $152,498.57
The financial benefits are the bonus to be paid in two years and the future salary.
PV of aftertax bonus paid in 2 years = $20,000(1 – .31)/1.0472
PV of aftertax bonus paid in 2 years = $12,588.84
PV = $2,225,680.91
So, the total value of a Wilton MBA is:
Value = –$152,498.57 + 12,588.84 + 2,225,680.91
Value = $2,085,771.18
Mount Perry MBA:
The direct costs will occur today and include tuition, books and supplies, health insurance, and the
room and board increase. The total direct costs are:
Total direct costs = $85,000 + 4,500 + 3,000 + 2,000
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/(.047 – .035)] – [1/(.047 – .035)] × [(1 + .035)/(1 + .047)]39}
4. He is somewhat correct. Calculating the future value of each decision will result in the option with the
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 signing bonus is constant. So, the
necessary PV to make the Wilton MBA the same as his current job will be:
6. The cost (interest rate) of the decision depends on the riskiness of the use of the funds, not the source
