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FINC2340 Presentation

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Ricci Pamintuan

on 9 April 2013

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Transcript of FINC2340 Presentation

Mini Case Term Project FINC2340 Presentation "The MBA Decision" Case title: Presented by: Mark Larsen, Jas Cuevas,
& Roby Pamintuan Scenario: Ben Gates • 28 year old Finance Undergraduate • Currently an employee at a money management firm (Dewey & Louis) • Expected retirement age: 66 • Personal goal: work as an investment banker 3 options: • Annual salary: $50,000 Option 1: Continue working at Dewey & Louis • Salary growth rate: 3% • Insurance plan is fully paid by company • Current avg income tax rate: 26% Option 2: Enroll at Wilton University Costs: • MBA degree requires 2 years
of full-time enrollment • Annual tuition costs: $65,000 • Estimated book & supplies cost per year: $2,500 Option 2 (continued): Post-graduation job offer: • Room & board per yr: $20,000 • Health insurance plan: $300 • Expected annual salary: $95,000 • Signing bonus: $15,000 • Annual salary growth rate: 4% • Average income tax rate: 40% • # of working years left: 36 Option 3: Enroll at Mt. Perry University Costs: • MBA degree requires 1 year of full-time employment • Tuition cost: $75,000 • Estimated book and supplies cost: $3,500 • Room & board: $10,000 • Health and insurance plan: $300 Option 3 (continued): Post graduation job offer: • Expected annual salary: $78,000 • Signing bonus: $10,000 • Annual salary growth rate: 3.5% • Average income tax rate: 29% • # of working years left: 37 Some non-quantifiable factors that affect Ben's decision to pursue an MBA degree: Reputation of school Age Accessibility to home Family responsibilities Health Advice given by reputable sources Advice given by friends & relatives Best alternative from a
strictly financial stand point: PV of cash flows from option 1 (at age 66): $760,206.67 PV of cash flows from option 2 (at age 66): $1,184,834.61 PV of cash flows from option 3 (at age 66): $1,145,935.85 Modern trend of career hopping Ben's conjecture to our analysis: "The appropriate approach to determining the value of each option is to calculate the future value of cash flows instead of calculating their present value." True or false? $44,959.27 If this amount is Ben's initial
salary offered under option 2,
Ben will opt to continue working
instead of pursuing an MBA. Currently, Ben's second option
offers an initial salary of
$95,000 per year. A reduction of the initial salary offered in option 2 worth $50,040.73 is necessary in order to make Ben indifferent about considering this option. Assume 2 further things: (1) Ben finances his tuition costs by borrowing funds (2) The borrowing rate is 5.4% How would these assumptions affect his costs? PV costs of Option 2 (with a 5.4 borrowing rate): $169,215.99 Effect: An increase in costs by $8.669.51 PV costs of Option 3 (with a 5.4 borrowing rate): $104,135.20 Effect: An increase in costs by $5,335.20 The effect of the interest costs will not be substantial enough to alter Ben's preference of enrolling at Wilton University. Conclusion Thank you for your attention!
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