GROUP MEMBERS Manoj Kumar Sahu ,Sachindra Saxena ,Sidheswar Mishra ,Ketan Mahapatra Dhrutiman Mishra

Comp of PVs of Ben's cashflowsMBA Decision
user: user:GOOD : 18 out of 20CashFlow Multiplier for our groupCASH FLOWS0.119047619PRESENT VALUEScenario 1Ben continues his JobSubmitted By Dhrutiman Mishra (#14005)Current SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)AssumptionsSachindra Saxena (#14008)6,547.623264,845.24Tax rate is constant for rest of his job periodManoj Ku. Sahu (#14006)Salary is paid at the end of each yearKetan Mohapatra (#14010)Tenure of Job (yrs)Discount Rate (r)PVIF
user: SGD PVIFA Siddeswar Mishra (#14013)386.520.54612629991740Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]

PV of the annuity series at time period 0 (PV0= c*PVIF)99,550.87

user: SGDCORRECT Scenario 2Ben undertakes 2-year MBA program at Wilton university and then joins a new JobEducation Cost Per Year (Payable at beginning of the year)AssumptionsTuiton Fees(7,500.00)Boarding & Books/Supplies expenses are Books & Supplies(297.62)payable at beginning of the yearHIP(357.14)Tax rate is constant for rest of his job periodBoarding expenses(2,380.95)
user: user:room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job, so either you also conbsider that in scenario 1 or do not consider it in any of the 3 cases . Salary is paid at the end of each yearTotal(10,535.71)Joining bonus is paid at the beginning of the year

PV of Year 1 Education expense at timeperiod 0 (= Year1 expense)(10,535.71)PV of Year 2 Education expense at timeperiod 0 (= Year2 expense/(1+r))(9,892.69)PV of total Educational expense at timeperiod 0 (PV0 = PV1 + PV2)(20,428.40)
user: user:OKAY

Income Per Year (Payable at end of the year)Expected SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)11,666.674318,050.00

Tenure of Job (yrs)Discount Rate (r)PVIF36
user: user:CORRECT 6.522.99117447589410Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]

Joining Bonus (Only for the 1st year, payable at the beginning of the year)Net Bonus1785.71428571431232.1428571429

PV of the annuity series at time period 2 (PV2= c*PVIF + Joining Bonus)186,311.10PV of the annuity series at time period 0 (PV0 = PV2/(1+r)^2)164,262.91

Total of All PVs (Education PV + Salary PV)143,834.50

Scenario 3Ben undertakes 1-year MBA program at Mount Perry College and then joins a new JobEducation Cost Per Year (Payable at beginning of the year)AssumptionsTuiton Fees(9,523.81)Matriculation means beginning of the yearBooks & Supplies(416.67)Boarding & Books/Supplies expenses are HIP(357.14)payable at beginning of the yearBoarding expenses(2,380.95)Tax rate is constant for rest of his job periodTotal(12,678.57)Salary is paid at the end of each yearJoining bonus is paid at the beginning of the yearPV of total Educational expense at timeperiod 0 (PV0=Year1 expense)(12,678.57)

Income Per Year (Payable at end of the year)Expected SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)9,642.863.5296,846.43

Tenure of Job (yrs)Discount Rate (r)PVIF376.521.75259630373180Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]

Joining Bonus (Only for the 1st year, payable at the beginning of the year)Net Bonus1,190.48845.24

PV of the annuity series at time period 1 (PV1= c*PVIF + Joining Bonus)149,772.83PV of the annuity series at time period 0 (PV0 = PV1/(1+r)140,631.77

Total of All PVs (Education PV + Salary PV)127,953.20
user: user:OKAY

Q&A-1&2Question 1How does Ben's age affect his decision to get an MBA?AnswerCurently Ben is 28 yrs old and expects to work for another 38 more years.According to the comparision of his Present values for the 3 scenarios, he will be more motivated to go for an MBA now because he finds substantial financial benifit between doing and not doing an MBA at this age.At age 28:Benefit in doing MBA over continuing job Present value of continuing Job = 99,550.870.0 Present value of doing 2 yr MBA = 143,834.5044,283.63 Present value of doing 1 yr MBA = 127,953.2028,402.32Lets say he decides to do the MBA when he is 38 yrs old with other inputs remaining same. In this case, the benefit will not be as much as compared to the earlier case.At age 38: Present value of continuing Job = 84,122.800.0 Present value of doing 2 yr MBA = 111,466.8527,344.05 Present value of doing 1 yr MBA = 103,330.5419,207.74Question 2What other, perhaps nonquantifiable, factors affect Ben's decision to get an MBA?AnswerBelow are some of the factors which can't be measured (non-quantifiable) and could affect Ben's decision to get an MBAi) Reptation of the college/university - Its mentioned that Bradley school (Mount Perry) is smaller and less know than the Ritter college (Wilton university).ii) Ben wanted to do an MBA iii)Strictly going as the Case problem the Reputation of the universities will affect his decision
user: user:okay

Q&A-3&4Question 3Assuming all salaries are paid at the end of each year, what is the best option for Ben from strictly financial standpoint?AnswerThe Present values of Ben's 3 options is calculated in the first tab. Hence from a financial standpoint Ben's best option would be to undertake the 2 year MBA from Wilton university as he would get the maximum time value of money at the end of his job career by doing so. Present value of continuing Job = 99,550.87 Present value of doing 2 yr MBA = 143,834.50 Present value of doing 1 yr MBA = 127,953.20Question 4Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?AnswerBen's belief that the Future value analysis of the options will be the most appropriate to do is not necessarily true.The way the timeline for all the 3 options has been started from the same starting point (Age 28 = timeperiod 0) in the first tab will not make any difference whether Present value or Future value analysis is used to derive at the conclusion.
user: user:NOT REQUIRED FV ANALYSIS WOULD YIELD THE SAME RESULT THAT IS WHAT YOU NEED TO REALISE AND WRITE Future value of continuing Job = 1,089,758.27 Present value of doing 2 yr MBA = 1,574,519.99 Present value of doing 1 yr MBA = 1,400,671.34As we see above, like Present value, the Future value of the 2 yr MBA option is also the highest among all the 3 options. So Ben can take his decision either based on Present or Future value analysis.

Q&A-5Question 5What initial salary would Ben need to receive to make him indifferent between attending Wilton university and staying in his current position?

AnswerIn order to make Ben indifferent between attending Wilton university and staying in his current position, Present values of both the options should be same and we need to find out how much will his Initial salary be when he joins his new job after his 2 yr MBA.PV of continuing job = PV of 2 yr MBA with 'X' as initial salary99,550.87 = Education PV + Salary PV wth initial salary 'X'99,550.87 = (20,428.40) + [(X*PVIF)+Net Joining Bonus]/(1+r)^2 [(X*PVIF)+Net Joining Bonus]/(1+r)^2 = 99,550.87 + 20,428.40 = 1,19,979.27 X*22.9911744758941 = [1,19,979.27 * (1 + 0.65)^2] - 1232.14285714286Therefore, X = 5,865.35So salary (including tax) will be 7,683.61
user: user:okay Hence an initial salary of $7,684 (as opposed to $11,667 ) will make Ben indifferent between attending Wilton university and continuing his current position.

Q&A-6Question 6Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4%. How would this affect his decision?
user: user:NOT CONSIDERED AnswerIf Ben borrows money for his education @ 5.4% then his required rate of return should be atleast 5.4%. That means that the new discount rate will be also 5.4%.We change the 'r' below and re-calculate the PVs for all the scenarios again.Scenario 1Ben continues his JobCurrent SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)6,547.623264,845.24

Tenure of Job (yrs)Discount Rate (r)PVIF385.424.30225458198480

PV of the annuity series at time period 0 (PV0= c*PVIF)117,750.21

Scenario 2Ben undertakes 2-year MBA program at Wilton university and then joins a new JobEducation Cost Per Year (Payable at beginning of the year)Tuiton Fees(7,500.00)Books & Supplies(297.62)HIP(357.14)Boarding expenses(2,380.95)Total(10,535.71)

PV of Year 1 Education expense at timeperiod 0 (= Year1 expense)(10,535.71)PV of Year 2 Education expense at timeperiod 0 (= Year2 expense/(1+r))(9,995.93)PV of total Educational expense at timeperiod 0 (PV0 = PV1 + PV2)(20,531.65)

Income Per Year (Payable at end of the year)Expected SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)11,666.674318,050.00

Tenure of Job (yrs)Discount Rate (r)PVIF365.427.29082172700510Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]

Joining Bonus (Only for the 1st year, payable at the beginning of the year)Net Bonus1785.71428571431232.1428571429

PV of the annuity series at time period 2 (PV2= c*PVIF + Joining Bonus)220,923.26PV of the annuity series at time period 0 (PV0 = PV2/(1+r)^2)198,865.85

Total of All PVs (Education PV + Salary PV)178,334.20

Scenario 3Ben undertakes 1-year MBA program at Mount Perry College and then joins a new JobEducation Cost Per Year (Payable at beginning of the year)Tuiton Fees(9,523.81)Books & Supplies(416.67)HIP(357.14)Boarding expenses(2,380.95)Total(12,678.57)

PV of total Educational expense at timeperiod 0 (PV0=Year1 expense)(12,678.57)

Income Per Year (Payable at end of the year)Expected SalaryRate of increase (g%)Tax rate (%)Net Income Per Year (c)9,642.863.5296,846.43

Tenure of Job (yrs)Discount Rate (r)PVIF375.425.78204578445320Formula - 1/(r-g)*[1-{(1+g)/(1+r)}^t]

Joining Bonus (Only for the 1st year, payable at the beginning of the year)Net Bonus1,190.48845.24

PV of the annuity series at time period 1 (PV1= c*PVIF + Joining Bonus)177,360.17PV of the annuity series at time period 0 (PV0 = PV1/(1+r)168,273.41

Total of All PVs (Education PV + Salary PV)155,594.84Hence, borrowing money will not change his decision because still the Present value of the 2 yr MBA is the highest among PVs all the scenarions at 5.4% rate of borrowing. However, Ben's present value for the 3 options has gone up in case of borrowing compared to if he spends his own money for education.