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The True Value of YOUR MBA

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The True Value of YOUR MBA [#permalink] New post 20 May 2008, 15:37
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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.
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Re: The True Value of YOUR MBA [#permalink] New post 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.
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Re: The True Value of YOUR MBA [#permalink] New post 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
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Re: The True Value of YOUR MBA [#permalink] New post 12 Aug 2008, 16:06
thanks ryguy947 for your explanation. Owe you one. +1
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Re: The True Value of YOUR MBA [#permalink] New post 26 Aug 2008, 20:20
ryguy904 wrote:
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.


Brilliant rguy. Thank you.

I just plugged in my current salary, estimated non-growth, a 50% increase in salary post MBA with growth to keep pace with inflation, and the ROI break-even was well beyond 10 years, even allowing for a bargain basement priced un-rated MBA program.

Given my current age, and likely age upon graduation, it's not pretty. In fact, money-wise, I'd be better off staying put and waiting out retirement or the next layoff.

Maybe getting the MBA anyway would be enough to open doors to make bigger leaps going forward. It certainly is better making some forward progress rather than staying put at a place where growth or promotion is unlikely. Guess that's a perk of being in the wrong industry in the wrong location in the wrong country... :/

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Re: The True Value of YOUR MBA [#permalink] New post 21 Oct 2008, 07:30
ryguy .. do you even need an MBA ??

brilliant !! [+1] for sharing !!
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Re: The True Value of YOUR MBA [#permalink] New post 05 Nov 2008, 10:20
Thanks for the spreadsheet. That was very helpful. I am basically trying to compare, part time and EMBA programs.
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Re: The True Value of YOUR MBA [#permalink] New post 18 Dec 2008, 12:49
Great model, very helpful. Also very important, because breakeven seems much less certain and much farther into the future than I had previously thought. I still think an MBA makes sense for me, but this is only the case when I consider (a) a 3-stage MBA career that is far more aggressive (in terms of salary) than a 3-stage no-MBA career; (b) the fact that I'm ready to get a new job in a different industry, and the ones that interest me necessitate my getting an MBA.

Thanks for passing this along. [+1]
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Re: The True Value of YOUR MBA [#permalink] New post 10 Oct 2009, 04:19
I would like to add an assumption that this model works in stable economies like USA's or Europe's, but not in Russia.
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Re: The True Value of YOUR MBA [#permalink] New post 23 Dec 2009, 11:10
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Re: The True Value of YOUR MBA [#permalink] New post 23 Feb 2010, 20:45
Fantastic! +1
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Re: The True Value of YOUR MBA [#permalink] New post 27 Mar 2010, 10:58
thought this may be useful..
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Re: The True Value of YOUR MBA [#permalink] New post 30 Mar 2010, 15:29
yeah, should find a way to include this in your applications :)

makes the part-time mba look pretty good... sort of (well, actually the long term difference is minimal and since working fulltime + part time mba probably means youre driving yourself a bit more insane than you would otherwise... maybe not)

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Re: The True Value of YOUR MBA [#permalink] New post 26 Apr 2010, 19:53
amazing.. thanks!
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Re: The True Value of YOUR MBA [#permalink] New post 29 Apr 2010, 08:15
Not sure if I should be happy or sad, but all three stages resulted in a 3yr ROI. I guess that's why I'm switching careers. :-D
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Re: The True Value of YOUR MBA [#permalink] New post 29 Apr 2010, 11:14
Thank you for this excellent tool.

What do people think of the ROI rate/horizon for candidates from MC or IB background?

I currently work for a MC firm with a very competitive package. Given a realistic post-MBA salary expectation of 160k (10% annual raises), it will take me approximately 20 years to break-even. For a 10-year breakeven horizon, I'd need to shoot for those 200k jobs (PE/VC/HF...)

I am set on getting a MBA (matriculating this Sept.), but this does worry me a bit...
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Re: The True Value of YOUR MBA [#permalink] New post 01 May 2010, 11:14
I'm really surprised to see people willing to forgo a $160k+ salary to pay full price for business school. I guess it depends on your exact work situation, but I feel like $100k tuition plus the opportunity cost of two years making $160k would be too high of a price for me.

What are your guys motives? Are you looking to move more into upper management, a career switch, or do you just hate your job?
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Re: The True Value of YOUR MBA [#permalink] New post 01 May 2010, 19:57
Interesting perspective. You're in MC now looking for a career switch - what are you looking to do after graduating, if you don't mind me asking?

I personally would have no real interest in IB after business school, and very limited interest in MC due to the insane hours and travel. It's just that I'm not sure they're avoidable in most MBA-grad jobs.
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Re: The True Value of YOUR MBA [#permalink] New post 01 May 2010, 20:18
af16 wrote:
Interesting perspective. You're in MC now looking for a career switch - what are you looking to do after graduating, if you don't mind me asking?

I personally would have no real interest in IB after business school, and very limited interest in MC due to the insane hours and travel. It's just that I'm not sure they're avoidable in most MBA-grad jobs.


I think I want to work on startups after B-School. Hopefully, I will have a successful business on my hand by the second year, or I will use the recruiting season to find out what I really want to do. As a last resort, I could always head back to my firm. For some MCs, B-School actually slows down your career trajectory. For example, I am up for promotion in December, the same kind of position I would get after 2 years of B-School.
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Re: The True Value of YOUR MBA [#permalink] New post 05 Jun 2010, 00:53
This is one of the best posts I have seen in the forum!

Have always wanted to create something similar and here it is!

Thanks.

Indeed, an IB job brings you no life, but it becomes attractive when you find out such career could significantlt shorten your breakeven period...
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Re: The True Value of YOUR MBA [#permalink] New post 04 Aug 2010, 22:58
Expert's post
ryguy904 wrote:
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.



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Re: The True Value of YOUR MBA   [#permalink] 04 Aug 2010, 22:58
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