Ben graduated from college six years ago. 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 Wilton University or Mount Perry College. Other than non paid internship neither school will allow it students to work while enrolled in its MBA program.
Ben current annual salary is $50000 per year, and his salary is expected to increase at 3%per year until retirement. He is currently 28 years old and expects to work for 35 more years. His current job includes a fully paid health insurance plan, and his current tax rate is 26%. Ben has a saving account with enough money to cover the entire cost of his MAB program.
The Wilton University is one of the top MBA in the nation. The MBA degree requires two years of full time enrollment. The annual tuition is $60000, Payable at the beginning of each school year. Books and others are estimated to cost $2500 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $95000 per year, with a $15000 signing bonus. The salary at this job will grow at 4% per year. His expected tax rate will be 31%.
The Mount Perry College is a smaller school which offers an accelerated one-year program, with a tuitions cost of $75000 to be paid upon matriculation.Books and others are estimated to cost $3500 per year. Ben thinks that he will receive a job offer for about $78000 per year upon graduation, with a $10000 signing bonus. The salary at this job will grow at 3.5% per year. His expected tax rate will be 29%.
Both schools offer a health insurance plan that will cost $3000 per year, payable at the beginning of the year Ben also estimates that room and board expenses will cost $20000 per year at both schools. The appropriate discount rate is 6.5%.
1. Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint?
2. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?
3. Suppose Ben must borrow the money. The current borrowing rate is 5.4%. How would this affect his decision?