Case Study

How does Mike’s age affect his decision to get an MBA?

1) Mike’s age affects the decision in terms of the ages before the retirement, which is t=40
in the case.
2) Nonquantifiable factors are the desire to study, self-esteem, self- satysfaction of what
he is doing
3) Mike is currently having 3 options:

 The first option is not to go get MBA and continue working in J.P. Morgan.
Currently he is getting $65 000, 26% tax income. He is planning to retire in 40
years and his salary is assumed to growth by 3% every year. Discount rate is
6,5%.
His current salary after the tax is = 65 000 * (1-0.26) = $ 48100;
PV of the salary is = C* 1/r-g * (1-((1+g)/(1+r))^t)= 48 100 * 1/0,035 * (1-
(1.03/1.065)^40) = $1 013 223, 776
NPV = $1 013 223, 776

 The second option is to go to the Harvard University for the 2-years program.
The tutition fee is 70 000 per year, also the insurance should be bought for 3000
per year and other expenses would be 2000 (roam and board) + 3000 (books and
supply) higher per year; The salary after the graduation is planned to be 110 000,
31% tax income with signing bonus of 20 000. The salary is assumed to growth
by 4% every year. Discount rate is 6,5%. Retirement in 38 years(40 – 2 years of
study).
o His salary after the tax would be = 110 000 * (1-0.31) = $ 75 900
PV of the salary PV of the salary is = C* 1/r-g * (1-((1+g)/(1+r))^t) =
75900 * 1/0,025 * (1-(1,04/1,065)^38) = $1 804 927, 684
o PV of the bonus (if it’s tax free) = C / (1 + r) ^t = 20 000 / (1,065)^2 =
17 633, 18566
o PV of costs, payed at the begging of the period (Annuity Due) = C * 1/r * (
1 – 1/(1+r)^t) * (1+r)
= ( 70000+2000+3000+3000) * 1/0,065 * (1 – 1/(1.065^2)) * (1,065) =
151 239, 4366
o PV of working in J.P. Morgan for 2 years = C* 1/r-g * (1-((1+g)/(1+r))^t)=
48 100 * 1/0,035 * (1-(1.03/1.065)^2) = 88 844, 3651
o NPV = $1 804 927, 684 + 17 633, 18566 - 151 239, 4366 - 88 844, 3651 =
$1 582 477,068

 The third option is to go to the Boston University for the 1 year program. The
tutition fee is 85 000 for the program, also the insurance should be bought for
3000 per year and other expenses would be 2000 (roam and board) + 4500
(books and supply) higher per year; The salary after the graduation is planned to
be 92 000, 29% tax income with signing bonus of 18 000. The salary is assumed
to growth by 3,5% every year. Discount rate is 6,5%. Retirement in 39 years (40 –
1 year of study).
 o His salary after the tax would be = 92 000 * (1-0.29) = $ 65 320
PV of the salary PV of the salary is = C* 1/r-g * (1-((1+g)/(1+r))^t) =
65320 * 1/0,03 * (1-(1,035/1,065)^39) = $ 1 462 896, 462
o PV of the bonus (if it’s tax free) = C / (1 + r) ^t = 18 000 / (1,065)^1 =
$ 16 901, 40845
o PV of costs, payed at the begging of the period (Annuity Due) = C * 1/r * (
1 – 1/(1+r)^t) * (1+r)
= ( 85000+2000+4500+3000) * 1/0,065 * (1 – 1/(1.065^1)) * (1,065) =
$ 94500
o PV of working in J.P. Morgan for 1 year = C* 1/r-g * (1-((1+g)/(1+r))^t)=
48 100 * 1/0,035 * (1-(1.03/1.065)^1) = $ 45 164, 3192
o NPV = $1 462 896, 462+ 16 901, 40845 – 94500 - 45 164, 3192=
$ 1 340 133, 551
From a strictly financial standpoint Mike should go to the Harvard University, because its’ NPV =
$1 582 477,068 and is the biggest.

4) Mike will make a mistake if he desides to calculate FV of the options