Ben’s age is critical in the decision to pursue the MBA. This is because the age indicates the number of years he has in the employment industry. As such, the age would inform the decision as the duration left in service would be used to compute the cash flows that would be accrue in terms of salaries and remuneration. The outcome would be compared to the costs incurred in pursued of the MBA. The figures would then be compared to the net cash flows that accrue in the absence of the MBA. This would inform the rationale for decision making on whether to pursue the MBA or not. It should be appreciated that the younger the age, the more beneficial it would be to pursue the MBA. The converse holds for older ages. This is in contemplation of the duration availed to recoup the costs of pursuing the MBA.
Non quantifiable factors affecting Ben’s decision
Ben’s decision could be affected by other non quantifiable factors such as social status and prestige. The society that Ben lives in could be practicing the culture that tends to hold scholars and individuals with higher learning with high regard. Consequently, Ben could be influenced into pursuing the MBA so as to get the societal appreciation and acceptance. In addition, Ben could be influenced by his peers and colleagues at work. A situation in which the peers in the workplace and other social places have attained higher learning similar to MBAs could influence Ben’s decision. He could be wishing to join the bandwagon and feel like the rest. Finally, Ben could be in the pursuit of his ambitions. He could have harbored the desire to attain high academic levels. In order to achieve his quest, he could easily be influenced into pursuing the MBA. Ben could be influenced by the time opportunity cost and the knowledge he will gain from pursuing the MBA
The best option from a financial standpoint:
Discounting rate = 6.5 %
Present of total cash inflows = present value of annuity due (with constant growth factor)
PV = A / (i-g) [1 – (1+ g / 1 + i)n]
Where:
PV = the present value of annuity due
A = annuity value at year one
n = number of years
i = the discounting rate
g = growth factor / rate
Option one: Job at East Coasts Yachts
Annual salary $50000
Duration of stay 40 years
Increase rate 3%
PV = A / (i-g) [1 – (1+ g / 1 + i)n]
50000 / (0.065 – 0.03) (1- (1 + 0.03 / 1 + 0.065)40) (1- 0.26) = $ 779,402.9048
Option two: Wilton University MBA
Annual costs for two years = $ 65000 per year
Books and other supplies for two years = $ 2500
Incremental rental expenses = $ 2000
Health and insurance = $ 3000
Total expenses per year = 65000+2500+2000+3000 = $ 72500
PV (A) = A (1 – (1+ r)-n)
r
PV for expense at beginning of year one = $72500
PV for expense at beginning of year two = 72500 (1 – (1+ 0.65)-1) = $68075.1174
0.065
Total expense for the two years of study= 72500+ 68075.1174 = 140575.1174
Annual inflows from year 3 (salary) = $90000
Bonus signing = $ 15000
Increase per year = 4%
Taxation rate = 31%
PV (years 3 to 40) = A / (i-g) [1 – (1+ g / 1 + i)n40] - A / (i-g) [1 – (1+ g / 1 + i)n2]
(90000/ (0.065-0.04) (1 – (1.04/1.065)40) - (90000/ (0.065-0.04) (1 – (1.04/1.065)2)
PV = 2,207,959.850 – 167,030.3511= $2,040,929.499
Less the taxation = (1-0.31) (2040929.499) = $ 1,408,241.354
Hence total incomes less costs:
Cost of education (140575.1174)
Bonus signing 15000.000
Total PV salaries 1,408241.354
Total net inflows 1282666.237
Option three: MBA at Mount Perry College
Tuition fees = $ 75000
Books and supplies = $ 3500
Incremental rental = $ 2000
Health insurance costs = $ 3000
Total expenses for the one year course = $83500
Annual salary per year (from year 2) $ 78000
Bonus signing $ 12000
Increase per annum 3%
Taxation rates 29%
PV (years 2 to 40) = A / (i-g) [1 – (1+ g / 1 + i)n40] - A / (i-g) [1 – (1+ g / 1 + i)n1]
78000/ (0.065-0.03) (1 – (1+0.03/1+0.065)40) – 78000/ (0.065-0.03) (1-(1+ 0.03/1+0.065)1)
PV= 1,643,065.583-73,239.43663 = $1,569,826.146
Less taxation = (1-0.29) (1569826.146) = 1,114,576.564
Hence total net inflows:
Costs of education (83500)
Bonus signing 12000
PV of salaries 1,114,576.564
Total net inflows 1,043,076.564
The best option from a financial standpoint is the pursuit of the MBA at Wilton University as it leads to the highest net cash inflow.
Evaluation of Ben’s calculation of the future value of the two options
Ben’s belief may be flawed for the MBA knowledge should not be limited to the two possible jobs he is likely to get after completion. It should be appreciated that the world in its dynamism could offer Ben better opportunities in the near future after successful completion of his MBA. He should, therefore, use other parameters such as the position and image of the colleges in making the decision rather than limit himself to their financial values.
The Initial salary that would make Ben indifferent to joining Wilton University and staying at the current job
The total net inflow obtained from attending Wilton University = $ 1282666.237
PV = A / (i-g) [1 – (1+ g / 1 + i)n] = 1282666.237
Then we replace the known variables to find the unknown:
1282666.237 = A/ (0.065-0.03) (1 – (1+ 0.03/ 1 + 0.065)40)
A = $60891.03657
Effect of borrowing capital to finance his MBA
If Ben had to borrow finance with the borrowing rates currently at 5.4%, it means he would incur additional costs in terms of interests and loan payment. This would effectively reduce the expected net inflows from either of the two options available for the pursuit of the MBA. Consequently, it could encourage Ben against pursuing the MBA due to the additional risk of incurring debts.
References
docstocTV. (2011, December 20). 3 Key Considerations Before Pursuing an MBA. Retrieved September 5, 2012, from www.youtube.com: http://www.youtube.com/watch?v=RHIWPJXrOJk
Arcidiacono, P., Cooley, J., & Hussey, A. (2007, January 3). The Economic Returns to an MBA. Retrieved September 4, 2012, from www.ssc.wisc.edu: www.ssc.wisc.edu/~jcooley/ReturntoMBA.pdf
Moldoveanu, M. C., & Martin, R. L. (2008). The Future of the MBA:Designing the Thinker of the Future: Designing the Thinker of the Future (illustrated ed.). Oxford: Oxford University Press.
