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7 Mar 2019

I have already solved the first 3 out of 4 questions, but I need help solving the 4th question. I have provided the answers to help answer the 4th question. Please help!

TVM. For this and the next 3 questions: Your brother just graduated from high school and is seeking your advice as to whether he should find a job immediately or go to college for 4 years and then find a job afterward. He estimates that if he gets a job immediately, he will earn $15,000 per year for the next 40 years. If he goes to college first, he estimates that he can earn $30,000 for each of the 36 years after he graduates. Whether or not he goes to college, he plans to retire 40 years from today. For simplicity, assume zero growth in income. He estimates that the 4 years of college will cost him $8,000 per year. Assume a discount rate of 14% (also, assume that he goes to college first, he could also borrow money at 14%). Assume that all cash flows occur at the end of each period.

1) What is the present value of his cash flows if he gets a job immediately? PV = $106,575.61

2)What is the present value of his cash flows if he goes to college first, foregoing therefore the opportunity to earn an income in the next 4 years? PV = $58,724.48

3) Suppose your brother’s chances of getting any job in the next 4 years are at best doubtful. In this case, you should assume that he will be unemployed during this period. What then is the PV of his cash flows if he goes to college first? PV = $102,430.16

4) Now assume income growth rate of 5%. Again, first year income if no college is $15,000. This amount will then grow at 5% per year. Similarly, first year income after graduating from college is $30,000, which will then grow at 5% per year. College cost of $8,000 is the same per year. Given this revised information, what is the present value of the cash flows if this individual chooses to go to college first, thus foregoing the opportunity to earn any income in the next 4 years?
a. $125,739.86
b. $58,724.48
c. $82,034.17
d. $102,430.16
e. $115,802.33
f. None of the above
Hint: On spreadsheet, grow both sets of incomes by 5% per year. Then use NPV function to find PV.

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Casey Durgan
Casey DurganLv2
8 Mar 2019

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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. 
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MINICASE The MBA Decision 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 $65,000 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 40 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 $70,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton, 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 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 $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will receive an offer of $92,000 per year upon graduation, with an $18,000 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 schools offer graduate housing. His room and board expenses will cost by $2,000 per year at either school he attends. The appropriate discount rate is 6.3 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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