MBA Decision Case Study

[ Rachel Lauren, Frida Leibowitz, Myrenda Ding]

Corporate Finance Spring 2016

Background
Ben Bates

College
Graduate

Finance
Major

28 years
old-works
at Dewey
& Louis

Expecting
to work 35
more
years

MBA or no MBA?

No MBA

MBA

Annual Salary: $50,000

Wilton University

Expected yearly
increase: 3%

Mount Perry

Tax rate: 26%

Paid Health Insurance:
Yes

Background (Cont.)

Wilton

Mount Perry

2 years

1 year

Tuition: $60,000+
$2,500+20,000

Tuition: $75,000+
$3,500+$20,000

Salary: $95,000+
$15,000

Salary: $78,000+
$10,000

Expected Yearly
Increase: 4%

Expected Yearly
Increase: 3.5%

Tax Rate: 31%

Tax Rate: 29%

Health Insurance:
$3,000/yr

Health Insurance:
$3,000/yr

Methodology and Assumptions:

q To understand the situation, we calculate the value of each option in Bens present terms using a discount model
q In all cases, tax was deducted from salaries and bonuses, but not from loans
q Opportunity cost is counted as a real cost when calculating NPV
q The discount rate used across calculations is 6.5%

1. How Does Bens Age Affect His Decision?

After a certain age, net present value of cash flows from getting MBA < NPV from staying at current job. Why?
q Less years available to compound value of the post-MBA salary and large tuition payments

40

28

63

50
NPV=636,223.41
(12 years D&L, 2 years Wilton, 21 years of work)

NPV=1,041,237.17 (2
(2 years Wilton, 33
years of work)

2. Other Decision Factors

Location
Bens future work location is a
consideration, as well as where he
would like to settle down and spend
his time.

NPV=728,896.23
(No MBA, 35 years
D&L)

School Lifestyle
Ben must consider the resources
and culture of the school to see if it
fits with his current lifestyle and
needs.

Quality of Skills Gained

Ben cares about the quality of
education and whether the skills he
gains will be useful for his target
career.
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3. Financial Analysis
Which is the best option from a strictly financial standpoint?
PV Growing Annuity (to calculate salary):

PV Annuity (to calculate MBA costs):

PV of a FV (to discount salary, bonus) :

3. Financial Analysis
Which is the best option from a strictly financial standpoint?

NPV Calculations
Dewey and Louis
Base Salary

Wilton University

Mount Perry

50000

95000

78000

Tax Rate

0.26

0.31

0.29

Growth Rate

0.03

0.04

0.035

0.065

0.065

0.065

35

33

34

Signing Bonus

15000

10000

Tuition Cost (annual)

85500

101500

Discount Rate
Time working (years)

Time in school (years)

Salary

728896.23

1424719.72

1147257.88

PV Salary

728896.23

1256117.37

1077237.44

PV Signing Bonus

--

9125.17

6666.67

PV MBA Cost

--

155663.56

95305.16

PV Salary not earned

--

68341.82

34741.78

1,041,237.17

953,857.16

NPV

728,896.23

3. Financial Analysis
Which is the best option from a strictly financial standpoint?
No MBA

$728,896.23

Wilton

Mount Perry

$1,041,237.17 $953,857.16

= PV Growing Annuity (t=33) = PV Growing Annuity (t=34)

+ PV Signing Bonus (t=2)
+ PV Signing Bonus (t=1)
= PV Growing Annuity (t=35)
PV MBA Costs (t=2)
PV MBA Costs (t=1)
PV Salary Not Earned (t=2) PV Salary Not Earned (t=1)
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4. Future Value of Options

How would Bens decision be affected if he uses FV to weigh his options?

NPV Calculations
Salary
PV Salary
PV Signing Bonus
PV MBA Cost
PV Salary not earned
NPV

Dewey and Louis Wilton University

Mount Perry
728896.23
1424719.72
1147257.88
728896.23
1256117.37
1077237.44
-9125.17
6666.67
-155663.56
95305.16
-68341.82
34741.78
728,896.23
1,041,237.17
953,857.16

Both NPV and FV calculations will produce the same answer (relative); in both
cases, the second option yields the highest value to Ben.

FV Calculations
FV of 35 years at D&L
$2,051,013.73

FV of 2 years at Wilton FV of 1 year at Mount Perry

and 33 years of work
and 34 years of work
$4,108,814.52

$3,179,769.12
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5. Comparisons
What salary would Ben need to make him indifferent between attending Wilton and not getting an MBA?

The present value of a 2 year Wilton MBA, a signing bonus of $15,000, and 33 years
of work at the initial salary (S) must be equal to the NPV of 35 years at D&L, his
current company.
Used Excel solver to calculate the initial salary (S)

PV of 35 years at D&L PV of MBA cost at Wilton

728,896.23

-155,663.56

Initial Salary (S)

PV Initial Salary

58,373.79
875,434.62

PV of Signing Bonus
9,125.17

(PV D&L) - (PV Wilton MBA)

(PV Signing Bonus)
875,434.62

6. Paying with Loans

Ben needs to borrow to pay and the interest rate is 5.4%. Should he still get an MBA?

We assume that Ben will pay off his loan in the 10 years after he receives his
MBA, in yearly payments calculated with the formula. *Will be discussed in
next slide.

PV of Periodic Loan Payments (starting immediately upon graduation)

Wilton University
PV MBA Cost
Interest Rate (per period)
Number of Periods
Yearly Payment

Mount Perry

155663.559

95305.164

0.054

0.054

10.000

10.000

20,552.595

12,583.346
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6. Paying with Loans

Ben needs to borrow to pay and the interest rate is 5.4%. Should he still get an MBA?

PV of Each Option, W/ Taking out a Loan

Wilton University

Mount Perry

PV Salary @ Graduation

1322772.86

1083031.58

PV Salary Now

1166234.97

1016931.06

9125.17

6666.67

68341.82

34741.78

1,107,018.32

988,855.95

PV Signing Bonus
PV Salary not earned
NPV

Dewey and Louis

NPV

728,896.23

Wilton University

Mount Perry

1,041,237.17

953,857.16

*Note: Regardless of the number of periods we would choose, it

would be worth it for Ben to take out a loan at a rate of 5.4%,
which is lower than the discount rate (6.5%)

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THANK YOU

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