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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.
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.
The True Value of YOUR MBA: http://gmatclub.com/forum/103-t64239 GMATClub's Unofficial Chartered Financial Analyst thread: http://gmatclub.com/forum/103-t63245 How Much Weight Does the CFA Carry with Admissions: http://gmatclub.com/forum/103-t68059
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.
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.
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.).
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?
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
Just trying to wrap my head around your discount rate assumptions. Are you assuming that the initial outlay (i.e. cost of MBA - tuition, books, etc) is amortized over the whole investment horizon (12 years in this case)? This is probably really picky, but there could be a situation where an individual borrows money to complete their MBA in year 1 and again in year 2, while accruing interest the whole time (so year 2 will have one period less in accrued interest charges). Just wondering what flexibility can be built into the model to allow for calc-ing degrees with borrowed funds (different amounts, amort schedules, etc).
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?
When you are making $120k-$160k in your mid-20s, chances are you are in MC or IB (PE). In my case, work-and-life balance simply does not exist. This is at least part of the reason why people start to look for exit as soon as they are promoted. My friends and I are always wondering why people would fight so hard to get into B-School so they can land a MC/IB job, when many of us are simply using B-School as an exit strategy. I guess the grass is always greener on the other side...
In terms of motivation, monetary ROI isn't the only metric for me. I genuinely want to learn more about business from world renowned professors and ambitious/smart classmates. However, I am still bit shocked to see the 20-year breakeven horizon (even with an above-average pay).
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.
Re: The True Value of YOUR MBA
21 May 2008, 15:54