Closing Case on MBA Decision

¶ … decision to enter an MBA program should take into account a number of factors. The financial part of the evaluation essentially takes into the expected improvements in earnings, and weighs these against the cost of the program. This is basically an NPV calculation. Therefore, Ben's age is a factor, because the younger he is, the more years of earning he will have. By accelerating his career path at a younger age, Ben will also have a higher ceiling.

There are a number of nonquantifiable factors that Ben would take into account. His family situation is one consideration. The MBA program will require a significant investment in his time and energy, not to mention money. The degree to which his family (if he has one) can bear losing his time, attention and earnings will have an impact on his ability and desire to pursue an MBA.

In order to determine the best decision from a strictly financial viewpoint, an NPV calculation for each option will need to be conducted. Assuming a discount rate of 6.5% and 40 years of working, Ben would have an NPV of after-tax earnings of $779,403.

The first MBA to take into consideration is the Wilton MBA. This has a net present value of $1,170,548. The second MBA to take into consideration is the Mount Perry MBA, which has a net present value of $1,089,084. If the decision is strictly financial, then Ben should sign up for the Wilton MBA, because it has the highest net present value.

4. Ben is incorrect that calculating the future value is the best option. He might be thinking that the present value is just the discounted future value, but that not the best way to look at the situation. The NPV calculation takes those future cash flows and converts them into today's dollars. This is essential, especially when looking upwards for forty years into the future, because the timing of the cash flows is important. The future dollar calculation does not take into account the timing of the cash flows. The NPV calculation allows for each of the options to be evaluated strictly on today's dollars, and this allows for easier comparison between the options. In this case, using future value would lead Ben to the same decision, but it might not -- the timing of the cash flows is important to take into consideration to ensure he is making the right decision.

5. For Ben to be ambivalent from a financial perspective between his current job and the Wilton MBA, the initial salary offer post-Wilton would need to be $62,692. This can be found by using the Solver function in Excel, so that the NPV of the Wilton option is the same as the NPV of the default option.

6. In corporate capital budgeting, the source of the financing is not relevant as per Modigliani-Miller. The discount rate should reflect the risk of the decision, rather than the choice of financing. In this case, paying cash is equivalent to using equity, which should have a higher discount rate than paying via debt.