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Short Capital Budgeting Paper Essay
The MBA Decision
1. Ben's age affects his decision to get an MBA because the MBA increases his annual earnings. The incremental financial benefit of the MBA will amount to more money, the longer Ben's remaining working career is. Thus, the younger Ben is, the more benefit he will get from obtaining an MBA.
2. There are some nonquantifiable factors that Ben may wish to take into account. For example, he might look at his current family situation – he may have a baby on the way, sick parents, or some other factor that might cause his to delay the MBA or to change his plans to go away. He might be able to work with his current company to achieve an MBA part-time, which would allow him to obtain the degree without career disruption. Ben might also want to examine if the MBA supports his goal. Because he wants to be an investment banker, it does, but there are many fields for which there would be limited benefit to obtaining an MBA.
3. Ben is faced with three options. The way to examine these options is to run a net present value calculation, weighing the incremental cash flows of these options. The one with the highest present value of future cash flow is the one that Ben should undertake.
First, the no MBA option, which provides Ben with the following:
[charts removed]
Based on financial considerations, Ben should pursue the Ritter MBA, as it has the highest NPV.
4. Ben is incorrect. The future value is not the correct approach. The net present value is. The reason for this is that the future value is going to skew towards larger numbers at the end of the period. The further away from t=0, the less reliable those numbers are, and the more steeply discounted they need to be. By not discounting those numbers, Ben is going to skew his analysis significantly.
5. This can be tested with trial and error, but is essentially the point at which his current salary would, plugged into the calculation, yield the same NPV as the Ritter MBA. This is easily done using the solver function in Excel. That salary is $84,555.08.
6. If Ben has to finance his MBA, that would definitely influence his decision, because it adds an incremental cost to the decision to pursue the MBA. This would reduce the net present value of either MBA. There is not…
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