Reference no: EM132777236

Question - Mr Tommy White graduated from college six years ago with a management undergraduate degree. Although he is satisfied with his current job, his goal is to become a business consultant. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to the Boston University.

Tommy currently works at the property management firm of Swire Group. His annual salary at the firm is $70,000 per year, and his salary is expected to increase at 2.5 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 15 percent. Tommy has a savings account with enough money to cover the entire cost of his MBA program.

The Boston University is one of the top MBA programs in the world. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is 75,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Tommy expects that after graduation from Boston, be will receive a job offer for about $120,000 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 17 percent.

The Boston University offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Tommy also estimates that room expenses will cost $2,000 more per year than his current expenses, payable at the beginning of each year. The appropriate discount rate is 5 percent.

Required -

a) How does Tommy's age affect his decision to get an MBA?

b) What other, perhaps nonquantifiable, factors affect Tommy's decision to get an MBA?

c) Assuming all salaries are paid at the end of each year, what is the best option for Tommy - remains at current job or takes a Boston's MBA? Why?

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

e) Suppose instead of being able to pay cash for his MBA, Tommy must borrow the money. The current borrowing rate is 5 percentage. How would this affect his decision?