Ben Graduated From College Six Years Ago, But He Is Satisfie

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 obtaining an MBA degree would facilitate this goal. After evaluating educational institutions, he has narrowed his options to Wilton University and Mount Perry College. Aside from unpaid internships, neither school permits students to work while enrolled in their MBA programs.

Ben's current annual salary is $50,000, with an expected annual increase of 3% until retirement. He is presently 28 years old and anticipates working for an additional 35 years. His current job provides a fully paid health insurance plan, and his effective 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.

The MBA program at Wilton requires two years of full-time study. The annual tuition is $60,000, payable at the start of each academic year. Additional books and expenses are estimated at $2,500 annually. Upon graduation, Ben expects to receive a job offer paying $95,000 annually, with a $15,000 signing bonus, and a salary growth rate of 4% per year. His future salary will be taxed at 31%.

Mount Perry College offers a shorter, one-year accelerated MBA program with a tuition fee of $75,000 payable upon enrollment. Additional books and costs are estimated at $3,500 annually. After graduation, Ben expects a starting salary of $78,000 with a $10,000 signing bonus, with an annual salary growth of 3.5%. His tax rate is projected at 29%. Both schools include a health insurance plan costing $3,000 annually, payable at the start of each year. Also, room and board expenses are estimated at $20,000 per year at both institutions. The relevant discount rate for evaluating future cash flows is 6.5%.

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Evaluating the financial viability of Ben's decision to pursue an MBA from either Wilton University or Mount Perry College requires a detailed analysis involving calculation of costs, potential earnings, and the time value of money. This analysis aims to identify the most financially advantageous option by comparing the net present value (NPV) of each pathway, incorporating salary increases, tuition costs, additional expenses, and post-graduation salaries.

To determine the best option for Ben from a strictly financial perspective, all relevant cash flows must be discounted at the given rate of 6.5% to reflect the time value of money. The analysis includes calculating the total costs associated with each program, including tuition, books, room, board, health insurance, and lost salary income during study periods, as well as estimating the present value of future earnings post-graduation.

For Wilton University, the financial calculation begins with assessing the two-year costs: tuition ($120,000 total), books ($5,000 total), room and board ($40,000 total), and health insurance ($6,000 total), totaling approximately $171,000 in direct expenses, excluding foregone salary income over this period. Ben's salary during the two-year study period would be foregone, resulting in a loss of current income amounting to $100,000 and growing annually by 3%. The opportunity cost must also consider the start of the higher salary post-graduation and its growth at 4% annually, discounted back to Present Value (PV).

Similarly, for Mount Perry College, the total costs include tuition ($75,000), books and other expenses ($3,500), room and board ($20,000), and health insurance ($3,000), summing to approximately $101,000. Ben’s salary loss during this one-year program would be $50,000, growing at 3% annually for the remaining 34 years of his career post-graduation. The expected starting salaries and growth rates determine the PV of future earnings, which, combined with the costs, indicates the overall financial benefit of each program.

Calculations reveal that despite the higher upfront costs of Mount Perry's accelerated program, the shorter study period minimizes income loss, and the lower duration of missing work translates to a higher net present value compared to Wilton's longer program. When considering the post-graduation salaries, the higher salary at Wilton's top-ranked university could tilt the balance in favor of Wilton, but only if the discounted value of future earnings exceeds the total costs and foregone income.

Additional considerations, such as the salary increments, tax implications, and health benefits, reinforce that the decision hinges on the present value of future income streams relative to the costs and opportunity costs incurred. The analysis demonstrates that the most financially advantageous option for Ben, from a purely monetary standpoint, is the program that maximizes the net present value of his total benefits minus costs. In this case, calculations indicate that Mount Perry's shorter program may offer a better financial return because of lower costs and shorter opportunity loss, despite slightly lower post-graduation salaries.

To address the second query concerning the initial salary required for Ben to be indifferent between attending Wilton and staying in his current position, an approximation entails equating the PV of future earnings from each scenario. The threshold salary would be calculated by solving for the initial salary that yields an equivalent present value of total future earnings, factoring in salary growth rates and tax considerations, alongside the costs involved in attending Wilton.

The third aspect considers potential borrowing. If Ben must finance the MBA costs through loans, the borrowing rate of 5.4% impacts the calculation by adding interest costs. This increases the total expenditure associated with each option, thus altering the net present value calculations. Higher borrowing costs would likely diminish the attractiveness of each program, especially for Wilton's higher total costs. Ben’s decision, in this case, would additionally depend on the trade-off between paying interest on loans versus the potential increase in future earnings.

In conclusion, a comprehensive financial analysis employing present value calculations, salary projections, and consideration of borrowing costs guides Ben’s decision. While Mount Perry’s shorter program may be more favorable financially due to lower immediate costs and shorter income loss, Wilton’s higher salary prospects post-graduation could outweigh these benefits. When factoring in borrowing costs, the decision could shift further based on the comparative increase in total expenditure and potential future income benefits. Ultimately, Ben should choose the path that maximizes his net financial benefit in the long term, considering both personal and financial factors.

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