Math Problem Statement
Raj Danielson graduated from university six 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 has narrowed his choice to either Assiniboine University or the University of Passy. Both schools encourage internships, but to get class credit for the internship, no salary can be accepted. Other than internships, neither school allows its students to work while enrolled in its MBA program.
Raj currently works at the money management firm of Prash and Sid. His annual salary at the firm is $55,000 and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 38 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Raj has a savings account with enough money to cover the entire cost of his MBA program.
The Sentinel School of Business at Assiniboine University is one of the top MBA programs in the country. The MBA degree requires two years of fulltime enrollment at the university. The annual tuition is $63,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $2,500 per year. Raj expects that after graduation from Assiniboine, he will receive a job offer for about $98,000 per year, with a $15,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent.
The Pond School of Business at the University of Passy be gan its MBA program 16 years ago. The Pond School is smaller and less well known than the Sentinel School. It offers an accelerated oneyear program, with a tuition cost of $80,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $3,500. Raj thinks that he will receive an offer of $81,000 per year upon graduation, with a $10,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent.
Both schools offer a health insurance plan that will cost $300 per year, payable at the beginning of the year. Raj also estimates that room and board expenses will cost $20,000 per year at both schools. The appropriate discount rate is 6.5 percent.
Is is more appropriate to use net present value or future value to analyze the best decision out of the 3 choices? Why?
Solution
Math Problem Analysis
Mathematical Concepts
Net Present Value (NPV)
Time Value of Money
Discounting
Formulas

Theorems

Suitable Grade Level
Postgraduate
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