Alternative 1 solution

UNDAY MINI CASE 60 POINTS John Ross graduated from college 2 years ago with a finance undergraduate degree. Although he is satisfied with his current job, his dream is to become an investment banker. To become an investment banker, he would need to take an MBA degree or to find any internship or job opportunity that will somehow introduce him to the investment world. He is thus looking for different alternatives. I will describe below the four options that John Ross has. In evaluating all these possibilities, assume that each option is effective immediately ("effective immediately means that if John Ross decides to stay at his current work, for instance, this decision will be taken today, at t=0). Alternative 1: Current Job at D&L He can keep his current job at the management fir D&L. His annual salary at the firm is $65,000 per year and is salary is expected to increase at 3% per year until retirement. He is currently 28 years old and he expects to work for 40 more years. His current job includes a full paid health insurance plan and is current average tax rate is 26%. John has a savings account with enough money to cover the entire cost of the MBA program. DAY Alternative 2: MBA Program at Carlton College The Carlton College offers a one-year MBA program. The tuition cost is $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. The Carlton program is a full-time one that does not allow students to work in the meantime. John thinks that after the Carlton degree he will be able to receive an offer of $92,000 per year with a $18,000 signing bonus. The salary at this job will increase at 3.5% per year. His average tax rate at this level of income will be 29%. Alternative 3: MBA Program at Northeastern University Northeastern University offers a two-years MBA program. The annual tuition is $90.000. Northeastern allows students to work while enrolled in the MBA program. After some research, John has found out that he can potentially work for his marketing professor as research assistant. The annual stipend for this position at Northeastern University is $25.000 for the first year and $27,000 for the second year. Books and other supplies are estimated to cost $2,000 per year. John expects that after graduation from Northeastern University he will receive a job offer of $85,000 per year with a signing bonus of $10.000. The expected salary will increase at 2% per year for the first 10 years. The growth rate will be 4% thereafter. The average income tax rate is 30%. Alternative 4: Econ consulting at Analysis Group John may decide to start working in an Econ consulting group to start gaining some experience in data mining. This experience will be precious for future career paths as 51 Page NDAY MINI CASE 50 POINTS) John Ross graduated from college 2 years ago with a finance undergraduate degree. Although he is satisfied with his current job, his dream is to become an investment banker To become an investment banker, he would need to take an MBA degree or to find any internship or job opportunity that will somehow introduce him to the investment world. He is thus looking for different alternatives. I will describe below the four options that John Ross has. In evaluating all these possibilities, assume that each option is effective immediately ("effective immediately" means that if John Ross decides to stay at his current work, for instance, this decision will be taken today, at t=0). Alternative 1: Current Job at D&L He can keep his current job at the management firm D&L. His annual salary at the firm is $65,000 per year and is salary is expected to increase at 3% per year until retirement. He is currently 28 years old and he expects to work for 40 more years. His current job includes a full paid health insurance plan and is current average tax rate is 26%. John has a savings account with enough money to cover the entire cost of the MBA program Alternative 2: MBA Program at Carlton College The Carlton College offers a one-year MBA program. The tuition cost is $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4.500. The Carlton program is a full-time one that does not allow students to work in the meantime. John thinks that after the Carlton degree he will be able to receive an offer of $92,000 per year with a $18,000 signing bonus. The salary at this job will increase at 3.5% per year. His average tax rate at this level of income will be 29%. Alternative 3: MBA Program at Northeastern University Northeastern University offers a two-years MBA program. The annual tuition is $90.000. Northeastern allows students to work while enrolled in the MBA program. After some ohn has found out that he can potentially work for his marketing professor as research assistant. The annual stipend for this position at Northeastern University is $25,000 for the first year and $27,000 for the second year. Books and other supplies are estimated to cost $2,000 per year. John expects that after graduation from Northeastern University he will receive a job offer of $85,000 per year with a signing bonus of $10,000. The expected salary will increase at 2% per year for the first 10 years. The growth rate will be 4% thereafter. The average income tax rate is 30%. Alternative 4: Econ consulting at Analysis Group John may decide to start working in an Econ consulting group to start gaining some experience in data mining. This experience will be precious for future career paths as 5 Page investment banker. He is currently thinking to apply for a position as "Junior Analyst" at Analysis Group. The position comes with a job offer of $75,000 per year and a signing bonus of $10,000. The salary is expected to be constant for the first 6 years, after which the company offers the opportunity to all the junior analysts to join an MBA program at Brandeis University. The MBA program at Brandeis University requires two years of full- time enrollment at the university. The annual tuition is $70,000. Books and other supplies are estimated to cost $3,000 per year. According to the Analysis Group corporate policy, half the tuition is paid by the company and half by the employee. After the completion of the MBA program, the employee can start working again for Analysis Group, but under a role that requires more responsibility, offers higher chances of networking, even in the investment and broker sector, and, among other things, rewards employees with a much higher stipend. More precisely, after the MBA degree, the junior analysts at Analysis Group will gain the role of "Associate with a stipend of $140,000 that will increase at 3% per year. There is no signing bonus after the employee re-enters the company. Under this scenario, the average income tax rate will be 31%. When analyzing alternative 4, assume that John, like all the other junior analysts at Analysis Group, is going to benefit from the MBA offer. In addition to the information provided above, all schools (Carlton, Northeastern, and Brandeis) offer a health insurance plan that will cost $3,000 per year. John also estimates that room and board expenses will cost $2,000 more per year at all schools than his current expenses. The appropriate discount rate is 6.3%. Assuming all salaries are paid at the end of the year, what is the best option for John from a strictly financial point of view? Evaluate the Present Value of the four alternatives