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.

It's amazing how soon the breakeven year is if you get into i-banking. I think mine is 2-2.5 years out or so vs. not getting an MBA and staying in my current non banking career.

+2 for you.

That's pretty neat. Thanks for sharing!

Impressive indeed - Thank you sir

You belong in an MBA program.

Great spreadsheet!

This will help me out in the near future, kudos!

Interesting spreadsheet there! Good Stuff...Kudos!

As I suspected...lower NPV for getting an MBA.

gr8 spreadsheet..... kudos to you

Great stuff! +1

This is one of the most valuable posts i have seen on GMATclub...kudos.

nice.

Great stuff man. Now that I looked at the numbers, I am rethinking whether going for the MBA is a good move or not.

What would you guys pick: MBA from Ross/Tauber institute with $0 Scholarship or $170K/year salary in bay area with loads of stock options?

For me, an MBA is a set goal of mine, so to simply make a pick between the two without further information would be incorrect. If I was you, I would make a list of pros and cons, then decide which side it favors.

sensation, i was in the same boat as you. roughly 160k/yr and stock grants that would have been vested in a year and a half. i ultimately decided that i want a mba.

it really is a matter of want. how badly do you want a masters degree, and pursue higher education. do your homework in realizing what a mba can and can not provide you.

Absolutely great spreadsheet Ryguy! Kudos coming your way. Just had a question - if I had to include my internship $'s in this sheet, is there a "right" place to do so?

Thanks again!

DD-
Thanks for the kind words! I totally forgot about the internship! I'll have a special input for that in version 2.0. In the meantime, the easiest way would probably be to do a "manual override" in Year 2 (2009). Simply reduce your tuition fees for that year by the expected amount to be earned from your internship. For instance, say you expect to earn $15,000. You can change cell D12 to read "=D30 + 15000." Notice this would be a plus sign since it is a positive cash flow. Hope that helps and thanks for the great suggestion. I'll post an update in the next day or so.
-RG

No problem- I sort of did work around it in a similar manner but wanted to make sure! Great spreadsheet and looking forward to V2.0

Excellent! Thanks for sharing.

Awesome! As rhyme said, you are more than ready for B-School