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In five years, you plan on starting graduate school to earn your MBA. You know that graduate school can be expensive and you expect you will need $15,000 per year for tuition and other school expenses. These payments will be made at the BEGINNING of the school year. To have enough money to attend graduate school, you decide to start saving TODAY by investing in a money market fund that pays 4% APR with monthly compounding. You will make monthly deposits into the account starting TODAY for the next five years. How much will you need to deposit each month to have enough savings for graduate school? (Assume that money that is not withdrawn remains in the account during graduate school and the MBA will take two years to complete.)

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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2. Your grandfather has agreed to deposit a certain amount of money each year into an account paying 7.25 percent annually to help you go to graduate school. Starting next year, and for the following four years, he plans to deposit $2,250, $8,150, $7,675, $6,125, and $12,345 into the account. How much will you have at the end of the five years?

To complete your last year in business school and then gothrough law school, you will need $10,000 per year for 4 years,starting next year (that is, you will need to withdraw the first$10,000 one year from today). Your uncle offers to put you throughschool, and he will deposit in a bank paying 5.77% interest a sumof money that is sufficient to provide the 4 payments of $10,000each. His deposit will be made today.

  1. How large must the deposit be? Round your answer to the nearestcent.
    $
  2. How much will be in the account immediately after you make thefirst withdrawal? Round your answer to the nearest cent.
    $

    How much will be in the account immediately after you make the lastwithdrawal? Round your answer to the nearest cent. Enter "0" ifrequired
    $

Ben Bates 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 this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry 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.

Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $53,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program.

The Ritter College of Business at Wilton 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 $58,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $87,000 per year, with a $10,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent.

The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated one-year program, with a tuition cost of $75,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,200. Ben thinks that he will receive an offer of $78,000 per year upon graduation, with a $8,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent.

Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben has also found that both school offer graduate housing. His room and board expense will decrease by $4000 per year at either school he attends. The appropriate discount rate is 6.5 percent.

QUESTIONS

1.How does Ben's age affect his decision to get an MBA?

2.What other, perhaps nonquantifiable, factors affect Ben's decision to get an MBA?

3.Assuming all salaries are paid at the end of each year, what is the best option for Ben from a strictly financial standpoint?

4.Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?

5.What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?

6.Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

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