center23002311409410012100center818008227695Sydney SingProfessor Jean Holt
February 8, 2018941009200Sydney SingProfessor Jean Holt
February 8, 2018center300003017520MBA Decision case studyFISV2000
9410036300MBA Decision case studyFISV2000
Based on the information, taking the time to attend business school would not be a good choice when it comes to talking about anything financial. The net present value of the future cash flows will be lower than what he receives now. It will be worse for Ben to get an MBA assuming that he will retire at sixty-eight years old.
Some nonquantifiable factors are the locations of the colleges and Ben’s personal life plan. For his personal life plan, Ben has to think about the effects of going back to the campus life at twenty-eight years old. Although it is unusual for a twenty-eight-year-old to live a normal college life, being a full-time student will effect daily routines and sacrifices will be made in current circumstances. As for location, it is one of the most important factors due to future job opportunities and choices of internships. Based on the area, Ben may have the opportunity for better internships and large range of working areas. When choosing a location, Ben has the advantage of meeting new people for potential networking that may be beneficial.
There are three options for Ben from a strictly financial standpoint which are not attending grad school, attending Wilton University, or attending the Bradley School.Calculations:Not getting an MBA: Cash inflowSalary = $60,000 x (1 – 26%) = $44,400 after 26% tax deduction Expected to increase at 3% / yearAppropriate discount rate = 6.5%Working years left = 40
PV of cash inflow = $44,400 1-1 + 3% 1 + 6.5%26.5% (1 + 6.5%) = $141,544
NPV = $1,608,964 = $141,544 = $1,467,720Attends Wilton University:Cash inflow:Signing bonus = $20,000 (end of year 2)Salary = $110,000 x (1-31%) = 75, 900 after 31% tax deduction Expected to increase at 4% per yearAppropriate discount rate = 6.5%Working years left = 38PV of cash inflow = ($20,000 + $75,9001 -1+4%1+6.5%386.5%-4%) / (1.065)2 = $1,608,964*Cash OutflowAnnual Tuition = $65,000Books and other supplies = $3,000Health insurance plan = $3,000Room and Board Expenses = $2,000 (delta)Total Cost = $73,000NPV= $1,608,964 – $1,467,720 =$1,467,720
Attends the Bradley School at Mount Perry College:Cash Inflow: Signing bonus = $18,000 (end of year 1)Salary = $92,000 x (1-29%) = $65,320 after 29% tax deduction Expected to increase at 3.5%/ yearAppropriate discount rate = 6.5%Working years left = 39PV of cash inflow= ($18,000 + $65,3201-1 + 3.5% 1 + 6.5%396.5%-3.5%) / (1.065) = $1,390,513Cash Outflow:Annual Tuition = $80,000Books and other supplies = $4,500Health insurance plan = $3,000Room and Board Expenses = $2,000 (delta)Total Cost = $89,500
NPV = $1,390,513 – $89,500 = $1,301,013
According to the NPV method, Ben’s best option is to attend Wilton University for his MBA as it has the highest NPV value.
Here are the present choices for each option:If Ben keeps his job, his growing annuity present value would be $805,819.If Ben attends Wilton University, his growing annuity present value would be $1,271,843.94.If Ben attends Mount Perry College, his growing annuity present value would be $1,131,791.00.The present value will give a better estimate than the future value because it ill show what Ben’s current net worth is. Therefore, most financial resources/ instruments are evaluated in present opposed to future values.
The initial salary before tax deduction that Ben would need to receive to make him indifferent between attending Wilton University and staying in his current position is $73,216. At this initial salary, both options will have the same NPV (Net Present Value).
Calculations: ($20,000 + Y * (1-31%) 1-1+4%1+6.5%386.5%-4%) / (1.065)2 – $141,544 = $935,283 * Y * (1-31%) 1+4%1+6.5%386.5%-4% = ($935,283 + $141,544) * (1.065)2 – $20,000 * Y * 0.69 *23.78 = $1,201,364
*Y = $73,216
In this situation, Ben will have to consider the cash out flows that he will deal with to repay the loan that includes principle and interest. For example, assuming Ben has a 5-year loan out with a borrowing rate of 5.4% and discount rate of 6.5%, the loan turns out to be a better funding option for his MBA. When borrowing money, the NPV values of the three options are the following:- Not getting an MBA = $935,238- Getting MBA from Wilton University = $1,471,596-Getting MBA from Mount Perry College = $1,303,654While overlooking these results, it is proven that Ben’s best option is to attend Wilton University as it has the highest NPV value. Therefore, his decision on taking out a loan may or may not get affected.
Calculations:Getting an MBA from Wilton University(5-year loan to pay the yearly cost of $73,000 at a 5.4% borrowing rate)
Monthly payment = $17,048, this amount is payable through the 1-5 year time span. For the second year’s borrowed loan, the amount is payable through a 2-6 year time span.
PV of loan payment = $17,048 * 1 – 11 + 6.5% 56.5% + $17,048 * 1 – 11 + 6.5%56.5% / 1.065 = $137,368NPV from previous calculation = $1,608,964NPV = $1,608,964 – $137,368 = $1,471,596
Getting an MBA from Mount Perry College
(5-year loan to pay the yearly cost of $89,500 at 5.4% borrowing rate)
Monthly payment = $20,901, this amount is payable through the 1-5 year time span.
PV of loan payment = $20, 901 * 1-11+6.5%56.5% = $86,859NPV from previous calculation = $86,859
NPV = $1,390,513 – $86,859 = $1,303,654