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# The True Value of YOUR MBA

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Current Student
Joined: 27 Jul 2007
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Schools: CBS, Cornell, Duke, Ross, Darden
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So I’ve had a little downtime over the last few days in the office and was thinking about my cost of earning an MBA. This mini-analysis ended up taking on a life of its own and it turned into a pretty sophisticated look at figuring out what am I giving up and how long (and how much) it is going to take to pay off. I realize that $is not the (only) reason that people go to b-school, but it's definitely an important factor. As a very analytical person, I thought it was important to dig deep on this topic. I have put together what I think is a comprehensive MBA return on investment (ROI) tool/model (more specifically, I used net present value, NPV). It looks at the MBA and non-MBA career paths and identifies not only when you’ll “breakeven” but also how your compensation will look over an extended period of time. I believe there are some other tools available online, but I don’t think that any of them offer much flexibility and are way to simplistic for a very important and complicated decision. Since I’ve gained so much from gmatclub, I wanted to share this tool so that my fellow g-clubbers can tailor it based on personalized life plans. For example, some people want to go into i-banking. This particular job function has a pretty unique compensation path. Moreover, most people that (want to) go into banking, only do so for a few years before jumping to investment management or private equity or some other excursion. Therefore, it wouldn’t make sense to say, “My compensation is going to be$350k for the next 12 years.” Other folks want to go into marketing, consulting, operations, strategy, etc. - areas that have different compensation tracks than investment banking. This tool is designed for any person starting with/transitioning to any career path.

I realize this may not be perfect, but I think it will be very informative regardless of your interests. This should help you whether you’re considering an elite vs. a trans-elite or a tier-two school vs. a regional program. It will also be helpful for those that are deciding between a part-time or full-time program. This will also help high-income earners that are deciding whether to go back to school at all. Ultimately, I wanted to create something that is user friendly and allows for almost an unlimited number of scenarios. If you have any questions, feel free to ask. Enjoy and let me know what you think.

Cheers,
ryguy

EDIT - Version 2.0 Available Now!

I made a handful of changes since I created this model last summer, but below are the two major changes that I have made:

1) Updated fields to incorporate internship earnings

2) Ability to easily compare a part-time v. full-time MBA program (from a financial perspective)

A couple of comments and feedback that were suggested from last time that I did not specifically address (and my reasons for choosing not to do so).

1) Debt service of student loans. So here’s the deal. This model assumes that tuition is paid upfront (i.e., during school). This is unrealistic for the vast majority of folks on the board here, and probably most students in general. However, I prefer to take a highly conservative approach when it comes to figuring out when I will break even. I suppose this is a worst-case scenario (i.e., makes the payback period look longer than it should), but in my mind, I’d rather err on the side of a longer payback period than a shorter payback period.

So why does this matter when tuition is paid? It is more expensive to pay for tuition with today’s dollars than it is X years down the road. For instance, if you are on a 10-yr repayment plan paying $600 a month -$600 in today’s terms is a lot more money than it is 5, 6, or 7 years from now (and for simplicity’s sake, let’s ignore fluctuations in the value of the US dollar). If you don’t believe me, ask yourself this: Would you rather I gave you $600 today or$600 in 6 years from now. Good, I’m glad we’re on the same page. For more detail on this, I explain this in general assumption #3 on the Instructions worksheet. In that section, I’ve also included instructions for a scenario that could be applicable for folks that go into investment banking, private equity, or any other very high paying post-MBA job.

2) Taxes. I received some comments saying that tuition is paid with after-tax dollars, but salary is listed in before tax dollars. Sure, fair enough. If you think that it is appropriate to adjust for this, multiple your salary by (1 minus your expected tax rate) and plug that in for your post-grad salary. I chose not to do this for the base case scenario, but again, I’ve tried to make this model flexible enough where you can put in whatever assumptions YOU think are appropriate.

Updated directions are included on the first worksheet of the excel file. Let me know if you have any questions. I’ll be happy to address any issues/comments that may be related to your particular circumstances. Also, if you think there are any improvements that could be made to this for future versions, I’ll see what I can do to incorporate them. And again, I'm human, so if you find any errors, let me know and I'll correct them. Enjoy and let me know what you think.
Attachments

File comment: Value of an MBA v2.0
Value of an MBA v2.0.xls [70 KiB]

File comment: Value of an MBA
Value of an MBA.xls [62 KiB]

_________________

The True Value of YOUR MBA: 103-t64239
GMATClub's Unofficial Chartered Financial Analyst thread: 103-t63245
How Much Weight Does the CFA Carry with Admissions: 103-t68059

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SVP
Joined: 04 Dec 2007
Posts: 1689
Schools: Kellogg '11
Followers: 14

Kudos [?]: 187 [0], given: 31

Re: The True Value of YOUR MBA [#permalink]  27 May 2008, 07:23
Director
Joined: 24 Apr 2007
Posts: 589
Followers: 3

Kudos [?]: 17 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  27 May 2008, 07:30
Good spreadsheet, though it makes me feel sad. My breakeven point is a long way off
Manager
Joined: 31 Oct 2007
Posts: 242
Followers: 1

Kudos [?]: 23 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  27 May 2008, 08:15
great model. i had set up a similar one before applying but yours is even more detailed.

the only thing i would add is that these types of models have a difficult time incorporating option value. there's obvious option value in completing an MBA program and getting a job you otherwise would not have been able to get, but there is a lot of "unknown" option value as well. to the extent that you meet the right people and get connected into amazing opportunities, so much the better. my point is that if the model is close on an after cost basis (as might be the case if you are not an aspiring finance baller), it's probably worth rolling the dice if you can get into a good school -- you never know what might come your way.
Manager
Joined: 12 Jul 2008
Posts: 74
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Kudos [?]: 4 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  17 Jul 2008, 19:14
thanks for providing this.
Director
Joined: 02 Jan 2008
Posts: 597
Location: Detroit, MI
Followers: 3

Kudos [?]: 29 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  18 Jul 2008, 07:11
Ryguy,

Great tool, very comprehensive!

Thanks!

~Sam
Senior Manager
Joined: 17 Jul 2007
Posts: 288
Location: The 408
Followers: 3

Kudos [?]: 2 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  18 Jul 2008, 12:58
great tool! How you would suggest us PT'ers edit it to make our situation reflect the results!

Either way, +1!!
_________________

-zakk

Friend to hamsters, snowboard cruiser, first person ever to score a 12 on the GMAT, bad golfer, decent PR hack, all around nice guy.

Current Student
Joined: 27 Jul 2007
Posts: 872
Location: Sunny So Cal
Schools: CBS, Cornell, Duke, Ross, Darden
Followers: 12

Kudos [?]: 193 [2] , given: 4

Re: The True Value of YOUR MBA [#permalink]  18 Jul 2008, 15:30
2
KUDOS
zakk wrote:
great tool! How you would suggest us PT'ers edit it to make our situation reflect the results!

Either way, +1!!

Great question, perhaps something that I can work on for Version 2.0.

I think the easiest way would be to manually override the cash flows for the first three years. For instance, the average full-time MBA does not have any income in Yr 1 and Yr 2 (with the exception of an internship), so his/her cash flow is negative and simply the amount of tuition. In your case, your tuition will be offset by your income (sweet!), so you will have positive cash flow in those years (salary - tuition + any company reimbursement = cash flow). You can use that as a starting point for your years 1 and 2. The other adjustment that you will need to make is for "salary upon graduation." I assume that the PT program is three years, instead of two, so you will need an override adjustment in year 3 (again, this is the aforementioned formula). From there it should work, since the stages are set up to increase your salary by the percentage that you designate.

Hope that helps. Let me know if you have any more questions or would like some clarity on this.
Manager
Joined: 23 Nov 2006
Posts: 177
Followers: 1

Kudos [?]: 60 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  20 Jul 2008, 15:44
great tool! +1!
SVP
Joined: 05 Aug 2007
Posts: 1502
Schools: NYU Stern '11
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Kudos [?]: 210 [0], given: 22

Re: The True Value of YOUR MBA [#permalink]  20 Jul 2008, 17:34
yikes, 6-7 years to recoup my investment in the best case scenario. Anybody want to try making an argument about how pursuing an MBA has significant intangible value not reflected in ryguy's mad awesome spreadsheet?

Certainly puts a lot of things into perspective.
Senior Manager
Joined: 23 Jan 2008
Posts: 498
Followers: 1

Kudos [?]: 52 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  21 Jul 2008, 15:44
solaris1 wrote:
yikes, 6-7 years to recoup my investment in the best case scenario. Anybody want to try making an argument about how pursuing an MBA has significant intangible value not reflected in ryguy's mad awesome spreadsheet?

Certainly puts a lot of things into perspective.

First off, hopefully you are also looking to enter a field that in some way you will find more enjoyable post-mba. That is some of the intangible value. Then, on the financial side you need to consider the spreadsheet is the average number. You will do better or worse than this, but will almost certainly not hit the exact number. The big thing here is,as "Sudden" said above:
"the only thing i would add is that these types of models have a difficult time incorporating option value"
I found this very well stated - Option value is very tough to predict. Basically, while not necessarily likely, you have a vastly increased chance of doing something that will make you filthy rich.

I think that sums up the 2 main intangibles - did I miss any?
Current Student
Joined: 16 Jun 2008
Posts: 104
Schools: Texas
Followers: 1

Kudos [?]: 10 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  23 Jul 2008, 11:46
Great spreadsheet ryguy! Haven't had a chance to really pour into it but looks like a fun tool.

I would like to add a potential question to those that are trying to calculate a precise ROI using this model. How does tax-affecting cash flows change the end result of your calculations? I'm not sure if the impact will be material or not but I'm looking forward to playing around with the model a bit to see.
Senior Manager
Joined: 17 Jul 2007
Posts: 288
Location: The 408
Followers: 3

Kudos [?]: 2 [0], given: 0

Re: The True Value of YOUR MBA [#permalink]  24 Jul 2008, 15:34
ryguy904 wrote:
zakk wrote:
great tool! How you would suggest us PT'ers edit it to make our situation reflect the results!

Either way, +1!!

Great question, perhaps something that I can work on for Version 2.0.

I think the easiest way would be to manually override the cash flows for the first three years. For instance, the average full-time MBA does not have any income in Yr 1 and Yr 2 (with the exception of an internship), so his/her cash flow is negative and simply the amount of tuition. In your case, your tuition will be offset by your income (sweet!), so you will have positive cash flow in those years (salary - tuition + any company reimbursement = cash flow). You can use that as a starting point for your years 1 and 2. The other adjustment that you will need to make is for "salary upon graduation." I assume that the PT program is three years, instead of two, so you will need an override adjustment in year 3 (again, this is the aforementioned formula). From there it should work, since the stages are set up to increase your salary by the percentage that you designate.

Hope that helps. Let me know if you have any more questions or would like some clarity on this.

Worked like a charm! Just took a bit of work.

Looks like 8 years to work mine off, but the opportunity this presents is simply too much to pass over, even if it is a year later than I'd like to start.

Thanks again!
_________________

-zakk

Friend to hamsters, snowboard cruiser, first person ever to score a 12 on the GMAT, bad golfer, decent PR hack, all around nice guy.

Current Student
Joined: 27 Jul 2007
Posts: 872
Location: Sunny So Cal
Schools: CBS, Cornell, Duke, Ross, Darden
Followers: 12

Kudos [?]: 193 [0], given: 4

Re: The True Value of YOUR MBA [#permalink]  24 Jul 2008, 17:53
zakk wrote:
Worked like a charm! Just took a bit of work.

Looks like 8 years to work mine off, but the opportunity this presents is simply too much to pass over, even if it is a year later than I'd like to start.

Thanks again!

Hey Zakk,

Glad that worked. I will definitely incorporate a PT feature in the next version.

As far as *your* payback goes, there is NOTHING wrong with 8 years. The way that NPV and the time value of money works is that if you are comparing project A (or no MBA in this case)and project B (MBA), you will choose the project that has the highest NPV (which for you is earning an MBA). If it said the payback was 45 years and you are 70 years old now, well, then that would be a problem. But for any of us in our 20's or even early 30's, there is nothing wrong with an 8 year or even a 10 year payback. If you include the intangibles, which unfortunately I'm not capable of quantifying - your payback will be even sooner!

All the best,
ryguy
Intern
Joined: 16 Jul 2008
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Location: USA
Schools: MIT, Chicago, Columbia, Yale, Kellogg
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Kudos [?]: 1 [0], given: 1

Re: The True Value of YOUR MBA [#permalink]  30 Jul 2008, 14:00
+1 for you, RyGuy. Very, very helpful stuff. Must have taken quite a bit of time and effort to set this up, so much appreciated!
Current Student
Joined: 28 Feb 2008
Posts: 370
Location: New York, Paris
Schools: Wharton '11
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Kudos [?]: 6 [0], given: 2

Re: The True Value of YOUR MBA [#permalink]  02 Aug 2008, 11:21
Nice spreadsheet!! Just one thing to note, your salaries are pre-tax and the tuition cost are post-tax. It may make more sense to convert tuitions cost to a pre-tax number (e.g $45K becomes 45/(1-0.40) = 75) Crap, my breakeven is 10 years + . Manager Joined: 06 Jan 2008 Posts: 215 Followers: 1 Kudos [?]: 53 [0], given: 1 Re: The True Value of YOUR MBA [#permalink] 03 Aug 2008, 14:14 Nice job. I did a similar exercise for my wife's medical school and physician career. Considers yourselves lucky, ladies and gentlemen, in an unspecialized medical practice (ie internal medicine), one never breaks even. Also, I did not notice a section in this model for debt service, which would add at least a few years onto the breakeven. Director Joined: 25 Dec 2007 Posts: 524 Schools: Harvard '11 Followers: 9 Kudos [?]: 63 [0], given: 28 Re: The True Value of YOUR MBA [#permalink] 03 Aug 2008, 16:19 In a 40+ year career, a breakeven point of 10 years is not bad at all! Let's say you work for 3 years, get your MBA, and then spend the next 10 years getting back to even. Then you spend the next 25 years making great money and living the good life. Intern Joined: 26 Jan 2008 Posts: 19 Followers: 1 Kudos [?]: 9 [2] , given: 0 Re: The True Value of YOUR MBA [#permalink] 10 Aug 2008, 06:20 2 This post received KUDOS interesting analysis, thank you. but why you are so pessimistic about your future? growth rates look a quite low. is it really than even in 2020 (12 years ahead) you can get only 186k with MBA and 90 without? what is your country and industry? I think you should believe in yourself more! P.S. what about taxation and inflation? do you estimate incomes after it? What about economic cycle? maybe changing career in the future? P.S.2: My ROI is definitely very negative, but I'm not worried about it. I think education can not be measured just in money. personal effect more important and can not be measured. Manager Joined: 11 Apr 2008 Posts: 202 Followers: 2 Kudos [?]: 17 [0], given: 1 Re: The True Value of YOUR MBA [#permalink] 12 Aug 2008, 10:45 This is a very good source of information but I think it is highly empirical, So I have several questions and I hope somebody will address to these. 1. Does this equation holds good for all MBA program? Or only from top 15 schools from US? 2. And the break even has been calculated taking 60k as current salary. What about those cases or people who are already making more than 60K? 3. Does this calculation addresses the increased tax and expenditure due to increase in salary in future? sorry to ask such basic or preliminary questions as I am from pure science background ( a very little idea on business and finance) thanks all _________________ Nobody dies a virgin, life screws us all. Current Student Joined: 27 Jul 2007 Posts: 872 Location: Sunny So Cal Schools: CBS, Cornell, Duke, Ross, Darden Followers: 12 Kudos [?]: 193 [2] , given: 4 Re: The True Value of YOUR MBA [#permalink] 12 Aug 2008, 11:21 2 This post received KUDOS subarao wrote: This is a very good source of information but I think it is highly empirical, So I have several questions and I hope somebody will address to these. 1. Does this equation holds good for all MBA program? Or only from top 15 schools from US? 2. And the break even has been calculated taking 60k as current salary. What about those cases or people who are already making more than 60K? 3. Does this calculation addresses the increased tax and expenditure due to increase in salary in future? sorry to ask such basic or preliminary questions as I am from pure science background ( a very little idea on business and finance) thanks all The numbers that I have plugged in are as a sample (i.e., illustrative purposes only) so that you know which data points you should enter ON YOUR OWN. As I said in my original post and in the directions tab, this is supposed to look at the value of YOUR MBA. So plug in YOUR numbers. It doesn't matter if you go to top 50 or top 5, it's all based on the assumptions that you put in. However, if you are assuming$140,000 starting salary for a top 50 school, well then "garbage in, garbage out."

Currently it does not account for taxes. The easy way to get around that is to simply enter all of your info in net tax (after tax) dollars.

And again, this is not designed to be the ultimate solution for everyone. The main point is to give you an idea what your situation looks like. If your NPV is 5 years - great. If it's 10, that's also great, since we are all concerned with the long run. Even if it's >20years, that may be OK for some people because of the intangible aspects of going to school (e.g., network, formal business education, career switch, etc.).

Hope that helps.
Re: The True Value of YOUR MBA   [#permalink] 12 Aug 2008, 11:21

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