Decision-making analysis in business management

¶ … Decision

Ben's age affects his decision to get his MBA because the amount of time remaining in the workforce will have an impact on the present value of his future earnings. As a younger worker, Ben will have 33 more years of earnings after his MBA. If Ben was older, he would have fewer years of higher earnings to offset the cost. It is important to remember that it is not the higher earnings, but the differential earnings that make a difference in the evaluation of the MBA decision. The longer the time frame for these differential earnings, the more they will be worth. Additionally, because the post-MBA jobs will see raises in excess of the raises Ben expects from his current job, the wage differential between MBA Ben and non-MBA Ben will grow larger with each passing year. As a result, the younger Ben is, the more he will benefit from getting an MBA.

There are several non-quantifiable factors that could affect Ben's decision to get an MBA. Intrinsic factors are often a substantial motivator for workers in knowledge-based positions. The MBA will give Ben a better position than the one in which he currently works. Additionally, the MBA will significantly improve Ben's prospects for promotion. This is relevant not just for the financial rewards, but for the overall job and life satisfaction that Ben will receive. Although he is happy in his current job for now, he may not be happy holding that position over the long-term, and the MBA gives him the opportunity to take on progressive positions that will consistently challenge him throughout his career.

Another non-quantifiable factor for Ben may be the opportunity to expand his network of contacts. The contacts and network one establishes in an MBA program can be some of the most important benefits of such programs. These contacts can remain with an MBA for their entire life, and as such can be valuable sources of new job and investment opportunities. The contacts can provide a much greater degree of career and life flexibility than Ben would find if he sticks with his current position. This factor can influence not only his decision to enroll in an MBA program, but his choice of program as well.

3. From a purely financial standpoint, the value of each decision can be weighed strictly by a present value calculation. The future cash flows of each option are discounted back to the present value, using the discount rate. The total of the present values for all the years is summed as the net present value. The option with the highest net present value is the option that Ben should pursue, from a financial standpoint. Assuming all salaries are paid at the end of each year, the best option for Ben from a financial standpoint is to attend Wilson University. This option carries a net present value of $1.207 million, compared with $1.072 million at Mount Perry and $0.787 million at Ben's current job with Dewis & Louis.

4. Ben's view that the most appropriate analysis is the net present value calculation for each option. This view has some merit, but I would argue that it must be taken in context with a broader range of non-quantifiable factors. The decision to obtain an MBA is based as much on career prospects as it is earnings prospects. In terms of the earnings prospects, the net present value calculation is a reasonable method. However, it is also an imperfect method, based on a set of assumptions. The effectiveness of this method is dependent on the quality of the assumptions. Because the assumptions regarding future cash flows can be wildly inaccurate, it is best to include some non-quantifiable evaluations as well.

For Ben, the most important is the degree to which the MBA will help him meet his short- and long-term career objectives. He needs to discuss the issue with people in the industry to help him determine that the MBA is a vital component to his objectives. He has assumed that it is, but if it is not, he will ultimately be dissatisfied with the decision even in the event that he achieves his desired income levels.

5. In strictly financial terms, for Ben to be indifferent between attending Wilson University and retaining his current position, the two options would need to have equal net present values. The initial starting salary for that to occur is $65,770. At this level, the net present value of the Wilson education will be $787,763, the same value as if Ben kept his current job.

6. If Ben were forced to finance his MBA education rather than pay for it by cash, this would impact his decision because it would impact his cash flows. The current calculation does not contain any financing costs. Yet, these costs are future cash flows. If Ben needs to finance his education, those future cash flows must be incorporated into his calculation. The specifics of the loan agreement will dictate at what point principle and interest payments will begin, but for the purposes of this discussion we will assume a 20-year repayment period and that all payments begin at the end of year 2 for the Wilson option and year 1 for the Mount Perry option.

The Wilson education costs a total of $171,000. The Mount Perry education costs a total of $101,500. Using Excel, we can calculate the annual payment for a 20-year term at 5.4%. We are also assuming monthly payments, and that these payments are tax deductible. This gives Ben a monthly payment of $1,166.55, which translates out to an annual payment of $13,999.80. For a Mount Perry education, the monthly payment will be $692.49 for an annual total of $8,309.82.