years ago degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he narrowed his choice to either Toronto University or Thompson Rivers University. Although internships are encouraged by both schools, to get class credit for internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Christopher currently works at a fund management firm of Wilcox and Smith. His annual salary at the firm is $60,000 per year, and his salary is expected to increase at 2.5 percent per year until retirement. He is currently 27 years old and expects to work till he is 65 years old. His current job includes a fully paid health insurance plan, and his current average tax rate is 27 percent. Christopher has a savings account with enough money to cover the entire cost of his MBA program. The Sauder School of Business at University of British Columbia is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $85,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $4,000 per year. Christopher expects that after graduation from UBC, he will receive a job offer for about $115,000 per year, with a $25,000 signing bonus. The salary at this job will increase at 3.5 percent per year. Because of the higher salary, his average income tax rate will increase to 36 percent.
years ago degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he narrowed his choice to either Toronto University or Thompson Rivers University. Although internships are encouraged by both schools, to get class credit for internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Christopher currently works at a fund management firm of Wilcox and Smith. His annual salary at the firm is $60,000 per year, and his salary is expected to increase at 2.5 percent per year until retirement. He is currently 27 years old and expects to work till he is 65 years old. His current job includes a fully paid health insurance plan, and his current average tax rate is 27 percent. Christopher has a savings account with enough money to cover the entire cost of his MBA program. The Sauder School of Business at University of British Columbia is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $85,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $4,000 per year. Christopher expects that after graduation from UBC, he will receive a job offer for about $115,000 per year, with a $25,000 signing bonus. The salary at this job will increase at 3.5 percent per year. Because of the higher salary, his average income tax rate will increase to 36 percent.
Chapter6: Business Expenses
Section: Chapter Questions
Problem 87DC
Related questions
Question
Transcribed Image Text:Christopher Cross graduated from college five years ago with a finance undergraduate degree. Although
he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA
degree would allow him to achieve this goal. After examining schools, he narrowed his choice to either
Toronto University or Thompson Rivers University. Although internships are encouraged by both schools,
to get class credit for internship, no salary can be paid. Other than internships, neither school will allow
its students to work while enrolled in its MBA program.
Christopher currently works at a fund management firm of Wilcox and Smith. His annual salary at the firm
is $60,000 per year, and his salary is expected to increase at 2.5 percent per year until retirement. He is
currently 27 years old and expects to work till he is 65 years old. His current job includes a fully paid health
insurance plan, and his current average tax rate is 27 percent. Christopher has a savings account with
enough money to cover the entire cost of his MBA program.
The Sauder School of Business at University of British Columbia is one of the top MBA programs in the
country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition
is $85,000, payable at the beginning of each school year. Books and other supplies are estimated to cost
$4,000 per year. Christopher expects that after graduation from UBC, he will receive a job offer for about
$115,000 per year, with a $25,000 signing bonus. The salary at this job will increase at 3.5 percent per
year. Because of the higher salary, his average income tax rate will increase to 36 percent.
The School of Business and Economics at Thompson Rivers University began its MBA program in 2005.
TRU is smaller and less well known than UBC. TRU offers an accelerated, one-year program, with a tuition
cost of $80,000 to be paid upon matriculation. Books and other supplies for the program are expected to
cost $4,000. Christopher thinks that he will receive an offer of $90,000 per year upon graduation, with an
$15,000 signing bonus. The salary at this job will increase 4 percent per year. His average tax rate at this
level of income will be 32 percent.
Both schools offer a health insurance plan that will cost $2,500 per year, payable at the beginning of the
year. Christopher estimates that room and board expenses will cost $3,000 more per year at both schools
than his current expenses, payable at the beginning of each year. The appropriate discount rate is 4.2
percent.
1. How does Christopher's age affect his decision to get an MBA?
2. What other, perhaps nonquantifiable, factors affect Christopher's decision to get an MBA?
3. Assuming all salaries are paid at the end of each year, what is the best option for Christopher - strictly
from a financial standpoint?
4. Christopher believes that the appropriate analysis is to calculate the future value of each option. How
would you evaluate this statement?
5. What initial salary would Christopher need to receive to make him indifferent between attending UBC
and staying at his current position?
6. Suppose instead of being able to pay cash for his MBA, Christopher must borrow the money. The
borrowing rate is 3.5 percent. How would this affect his decision?
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