David Jetter graduated from college six years ago with a finance
undergraduate degree. Although he is satisfied with his current job, his
goal is to become an investment banker. He feels that an MBA degree
would allow him to achieve his goal. After examining schools, he has
narrowed his choice to either Prentice University or Mount Alliance
College. Although internships are encouraged by both schools, to get
class credit for the internship, no salary can be paid. Other than
internships, neither school will allow its students to work while
enrolled in its MBA program.
David currently works at the money management firm of Dewey and Louis.
His annual salary at the firm is $50,000 per year, and his salary
expected to increase at 3 % per year until retirement. He is currently
28 years old and expects to work for 40 more years. His current job
includes a fully paid health insurance plan, and his current average tax
rate is 26 %. David has savings account with enough money to cover the
entire cost of his MBA program.
The Ritt College of Business at Prentice University is one of the top
MBA programs in the country. The MBA degree requires two years of full
time enrollment at the university. The annual tuition is $65,000,
payable at the beginning of each school year. Books and other supplies
are estimated to cost $3000 per year. David expects that after
graduation from Prentice, he will receive a job offer for about $110,000
per year, with a $20,000 signing bonus. The salary at this job will
increase at 4 % per year. Because of the higher salary, his average
income tax rate will increase to 31 %. The Bradel School of Business at
Mount Alliance College began its MBA program 16 years ago. The Bradel
School is smaller and less well known than the Ritt College. Bradel
offers an accelerated, one – year program, with a tuition cost of
$80,000 to be paid upon matriculation. Books and other supplies for the
program are expected to cost $4,500. David thinks that he will receive
an offer of $92,000 per year upon the graduation, with an $18,000
signing bonus. The salary at this job will increase at 3.5 % per year.
His average tax rate at this level of income will be 29 %. Both schools
offer a health insurance plan that will cost $3,000 per year, payable at
the beginning of the year. David also estimates that room and board
expenses will cost $2,000 more per year at both schools than his current
expenses, payable at the beginning of each year. The appropriate
discount rate is 6.5 percent.
3. Assuming all salaries are paid at the end of each year, what is the
best option for David – from a strictly financial standpoint? Explain
why in detail with calculations.
4. David believes that the appropriate analysis is to calculate the
future value of each option. How would you evaluate this statement? So
what is the future value of each option?
5. What initial salary would David need to receive to make him
indifferent between attending Prentice University and staying in his
Explain in detail with calculations.