Practical case based on time value concepts

Deciding Program for further studies

Jack Gates graduated from college 6 years ago with a undergraduate degree in finance stream. Although he is satisfied with his current job, his aim is to become an investment banker. He feels that Master of business administration degree would allow him to attain his target. After examining business schools, he has shortlisted  his choice to either York University or Xavier College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither of schools shall allow its students to work while enrolled in its MBA program.

Jack is currently doing job at the accounting firm of D&L. The annual package he gets at the firm is $53,000 per year, and his salary is expected to grow at three percent per year until retirement. He is 28 years old and is expected to work for 38 more years. His current job includes special plans like health insurance plan, and his current average tax rate is 26 percent. Jack also has a savings account with enough money covering the entire cost of his master’s program.

The Mount College of Business at York University is one of the best MBA programs in the country. This Masters 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. Jack thinks that after graduation from York, he will get 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 Segal School of Business at Xavier College began its MASTERS program 16 years ago. The Segal School is smaller and less well known than the Mount College. Segal 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. Jack expects that he will receive an offer of $78,000 per year upon graduation, with an $8,000 signing bonus. The salary at this job shall increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent.

Both business schools offer a health insurance plan that will cost $3,000 yearly, payable at the beginning of the year. Jack has also found that both schools offer graduate housing. His room and board expenses will decrease by $4,000 per year at either school he attends. The appropriate discount rate is 5.5 percent.

QUESTIONS

1. Does Jack’s age affect his decision for further studies? How?

2. What other factors(nonquantifiable) affect Jack’s decision to get enrolled in further studies?

3. Assume all salaries are paid at the end of each year, what is the best option for Jack from a financial point?

4. Jack believes that the appropriate analysis is to calculate the future value of each option. Do you think it is wight way? How would you evaluate this statement?

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

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