Ben Graduated From College Six Years Ago Although He Is Sati
Ben Graduated From College Six Years Ago Although He Is Satisfied Wit
Ben graduated from college six years ago. Although he is satisfied with his current job, his goal is to become an investment banker. He believes that obtaining an MBA degree would help him achieve this goal. After evaluating his options, he has narrowed his choices to two schools: Wilton University and Mount Perry College. Both institutions do not allow students to work while enrolled in their MBA programs, aside from unpaid internships. Ben’s current annual salary is $50,000, with an expected annual increase of 3% until retirement. He is 28 years old and plans to work for another 35 years. His current job includes fully paid health insurance, and his tax rate is 26%. He has enough savings to cover the entire cost of the MBA program.
Wilton University is recognized as one of the top MBA programs nationally. Its two-year full-time program costs $60,000 per year, payable at the beginning of each academic year. Additional expenses for books and supplies are estimated at $2,500 annually. Upon graduation, Ben expects a job offer with a starting salary of approximately $95,000, including a $15,000 signing bonus. The salary in this role is projected to grow at 4% per year. His expected tax rate during this period is 31%.
In contrast, Mount Perry College offers an accelerated one-year program costing $75,000, payable at matriculation. Books and supplies are estimated at $3,500 annually. Post-graduation, Ben anticipates a salary of about $78,000, with a $10,000 signing bonus. This salary is expected to increase at 3.5% annually. The tax rate in this scenario is 29%. Both programs include health insurance costing $3,000 annually payable at the beginning of each year, and room and board expenses are estimated at $20,000 per year for both options.
Using a discount rate of 6.5%, the assignment involves calculating and comparing the financial costs and benefits of each educational route. The specific questions to address are:
1. From a strictly financial perspective, which option is best for Ben?
2. What initial salary would Ben need to make attending Wilton University financially equivalent to remaining in his current position?
3. How would borrowing at the current rate of 5.4% affect Ben’s decision if he needed to finance the MBA?
The analysis will involve calculating present values of costs and expected future earnings, considering tuition, living expenses, tax implications, and salary growth projections.
Paper For Above instruction
Benjamin's decision to pursue an MBA is driven by career aspirations and the potential financial benefits that such an advanced degree may provide. Evaluating his options through a strictly financial lens involves understanding the costs associated with each program, the potential increase in earnings post-graduation, and the broader economic implications of his choice over his working life. This analysis will utilize present value calculations to compare the net financial benefits associated with each pathway, thereby determining the most advantageous route for Benjamin from a purely economic standpoint.
Cost Analysis of Each Educational Path
The first step involves calculating the total costs associated with each educational option, incorporating tuition, books, living expenses, and health insurance. For Wilton University, the total cost over two years includes twice the annual tuition of $60,000, equal to $120,000, plus two years of books costing $2,500 each, totaling $5,000. Additionally, room and board expenses accrue over two years at $20,000 annually, totaling $40,000. Including health insurance of $3,000 per year, the total health-related expenses over two years amount to $6,000. Summing these costs: $120,000 (tuition) + $5,000 (books) + $40,000 (room and board) + $6,000 (health insurance) yields a total expenditure of approximately $171,000.
For Mount Perry College, the one-year program entails a tuition payment of $75,000 upfront, with books costing $3,500 annually. Since it's a one-year program, the total costs are $75,000 + $3,500 + $20,000 (room and board for one year) + $3,000 (health insurance), summing to approximately $101,000. The initial higher tuition is offset by the shorter duration, reducing living and insurance costs over time.
Post-Graduation Salary and Growth Projections
Following graduation, Ben anticipates a significant increase in earnings at Wilton University, with an initial salary of $95,000 and a 4% annual growth rate. Conversely, Mount Perry's graduates start at approximately $78,000 with a 3.5% increase. Using these figures, the present value (PV) of future earnings over Ben’s remaining 35-year working period can be estimated. Discounting these salaries at 6.5%, the PV calculations incorporate the growing annuity formula, accounting for salary increases each year and the time value of money.
Specifically, the PV of future salaries is calculated with the formula: PV = Salary_{initial} * [(1 - (1 + g)/(1 + r)^{n})] / (r - g), where g is the growth rate, r is the discount rate, and n is the number of years. Applying this formula yields the discounted value of total earning potential in each scenario.
Other Economic Considerations
Additional factors influencing the financial assessment include increased tax rates post-MBA and the cost of health insurance coverage. The expected tax rate increases from 26% to 31% at Wilton and from 26% to 29% at Mount Perry. Should Ben need to borrow money for tuition, the loan amortization at a 5.4% interest rate impacts total costs by adding interest expenses, reducing the net benefit of each option.
Comparison and Decision-Making
By analyzing the PV of the total costs and income streams, the more financially advantageous route can be identified. Preliminary calculations suggest that, despite higher tuition, Wilton's higher starting salary and faster growth rate may result in a greater lifetime earning potential when discounted to present value. However, the initial investment required, opportunity costs, and risk factors should also be considered. If Ben were to finance his education, the cost of borrowing would increase total expenses, possibly diminishing the attractiveness of Wilton despite its higher earning potential post-graduation.
Conclusion
From a purely financial perspective, Wilton University appears to be the better investment due to its higher starting salary and growth prospects, despite its higher upfront costs. However, the precise calculations depend on detailed PV estimations, which must incorporate salary growth, tax implications, and discounting future earnings. Nonetheless, the analysis underscores the importance of comprehensive financial planning, including considering student loan costs, to make an informed decision aligned with long-term financial goals.
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