Assignment 1 Managerial Finance 650-Ashford Essays

Assignment 1 Managerial Finance 650-Ashford Essays Assignment 1 Managerial Finance 650-Ashford Essay Assignment 1 Managerial Finance 650-Ashford Essay Assignment 1 Closing Case Chapter 4- MBA Decision Keith C. Quarles Managerial Finance Robert Watson 3-26-12 1 Age can play a significant part in the decision whether to keep working or go back to school. A young person can go back to school and still have time to chase a career whereas an older person would have a smaller window of opportunity and may not as willing to chance giving up their livelihood to get a degree. The opportunity costs of leaving the job may be equated in the coming years after graduating considering the added value to the marketability of the student once a degree is attained as reflected in a higher base salary than the previous job which would make the investment a worthy endeavor. Of course the cost of tuition must be added in as an explicit costs. 2 . Maybe the most notably important non quantifiable aspect of the decision is marital status. Other opportunity costs are involved implicitly; namely, quality time with loved ones and the finances toward school that could be used to care for the family. The opportunity costs can be implicitly affected by the individual perception of the value of the alternative(s) foregone versus. the one chosen.. 3 He has three choices; remain at his current job, pursue a Wilton M.B.A. or pursue a Mt. Perry M.B.A. Stay at current job: After tax salary =$55,000 (1-.26 )=$40,700 Given that his salary will grow 3 percent each year the present value of his after-tax salary is : Pv = Cost Pv= $857, 343.20 Wilton MBA : The direct/explicit costs of attending Wilton are the costs of tuition ,books, health insurance, room and board and other supplies. The present value of t he direct costs are : P V of direct expenses = ($65,000 +2,500+3,000+2,000) + ($65,000+2,500 +3,000 +2,500) /1.065 Pv of direct costs = $140,575.12 Next for the lost salarys opportunity costs; Pv o f lost salary=$40,700/( 1 . 0 6 5 ) +$40,700( 1 + 0 3 )/( 1+.065) 2 = $75,176.00 The increase is the present value of his future salary , plus bonus which is: Present value of after tax bonus paid in 2 years= $ 20,000 (1.31) / 1.0652 =$12, 166.90 After ta x salary = $100,000 (1 -. 3 1 ) = $69,000 His salary will grow a t 4 percent per yea r but he will only work 38 years. His present value of his after tax salary is : Pv =$1,640,84. 35 First salary payment is three years from today so we discount for two years to get this value as follows : P v = $1,640,843.35/ 1.0652 Pv =$1,446,664.77 The total value of a Wilton M.B.A. = $140,575.12 75,160 +12,166. 90 +1,446,664.77=$1,246,958.48 Mount Perry MBA : Total direct costs = $75,000 +3,500+3,000 + 2,000 = $83,500 when paid today which makes it the direct cost present value also. P v of indirect costs (lost salary)=$40,700 /(1.065)=$38,215.96 Next we compute his salary:: Pv of after tax bonus paid in 1 year= $16,000 (1- .29 ) /1.065=$10,666.67 Aftertax salary=$88,000(1-.29 )= $62,480 His salary will increase at 3.5 percent/yr sand he will work for 39 years thus the present value of his aftertax salary is:: Pv = $1,399, 292.27 That is the first year salary but the first salary payment is in two years so we discount for one year to find todays value as follows : Pv =$1,399,292.27 /1.065 Pv = $1,313,889.45 Total value of a MT. Perry M.B.A. is: $83,500- 38,215.96 + 10,666.67+ 1,313,889.45 = $1,202,840.16 4 . The future value in this case for each decision will have the highest present value accounted for and also the highest future value. Thus to assume that using the future value for all decision is the best method is incorrect because in this case the present value analysis will give the same answer. . 5 . In order to find the salary offer that would make the Wilton M.B.A. as attractive as his current job we can use the pv of his current job plus the cost of attending Wilton and the after tax pv of the bonus. Calculated as folows:: Pv =$857,343.20 = $13 6 ,697.18 + 75,176.00 +12,166.9 0 + Pv of salary Pv of salary=$1,060,927.42 Given that his current present value of his job salary and the Wilton expenses are equal in costs the present value of the salary in two years when he graduates must be : Value in 2 years=Value today(1+ r )2 Value in 2 years =$1,060 7927.42(1+ 065 ) 2 Value in 2 years= $1,203,330.40 First salary payment: Growing annuity equation calculation Since the after tax salary is $ 5 ,0601.90 the pre tax salary must have been as follows: $50,60. 90 / (1+ 3 1 ) Pre tax salary = $73,336 09 6 . T h e opportunity cost represents the risk associated with choosing one alternative over the other and in this case whether he borrows or or pays cash does not matter in the consideration of the interest rate of the decision.