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What is The average time to recover $$$ investment in MBA

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What is The average time to recover $$$ investment in MBA

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 [#permalink] New post 02 Mar 2007, 16:52
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kidderek wrote:
I wouldn't count opportunity cost, it is bogus. Why would you include two years salary when you're not working during those two years? The only debt you incur is the bottom line. If you slum it, you can pay off the 80k within a few years and you're golden.

Of course, that's if you're single or attached to someone who is independent.


You need a course in economics and finance :)

Because its a real cost, not an imagined one. Thats actual money you wont make, so its a true cost of attendance. Put it this way - if you are a contractor and you make $50 an hour, and you take a week off work to go on vacation, what did that vacation cost you? Did it cost you the flight ticket and hotel, or did it cost you the flight ticket, hotel, and $50 * 40 ? Hopefully you realize its the latter. What if it wasn't? What would that imply? That would suggest that whether or not I worked for a living, there would be no difference. Of course, as anyone will tell you, there is a difference between employment and unemployment.

Where I do think its wrong is to count the lost income AND living expenses because those are expenses you would have incurred ANYWAY, and they aren't arguably, any larger than those you would have incurred. If you count living expenses on one side, you cant count salary as well, or your double counting.

Lets look at a simpler example first. Lets say I have a car that I pay $400 a month for, and I pay $100 a month in insurance, and $100 a month in gas. Lets say I own the parking spot its on because renting one would have cost $250 a month, and for the sake of simplicity, I pay no taxes on that property. How much does the car actually cost me?

If you said $600 a month, you'd be wrong.

$600 per month is the fixed cost of the car.
$250 a month is the lost opportunity of owning the car.

Put it this way -

If I own the car, I spend $600 a month.
If I dont own the car, I save the $600 a month but I ALSO make $250 a month on the own car spot by renting it out.

Thus, my PERCEPTION is that the car is costing me $600, but really, its costing me $850.

So if we look at the previous problem from a cash flow perspective:

Year 0: -40000 (tuition) + -90000 (salary)
Year 1: -40000 (tuition) + -90000 (salary)
Total outflows: -260,000

Year 2: +100,000 - 90000
Year 3: +120,000 - 92000
Year 4: +130,000 - 94000
Year 5: +140,000 - 95000

Right? (assuming you get SOME KIND of raise year over year if you didnt get an MBA)

Do you see why?

Year 0 and Year 1 represent the both the actual cost of attendance, above and beyond the cost I would normally incur (or id be double counting), AND the lost income. You have to consider this just like you have to consider it in the parking example I had above.

So whats this all come out to?

-260,000 + 10,000 + 28,000 + 36000 + 45000
-260K + 119K = -$141K

So were still short, a couple more years here. Assuming you plateau out at about $140 for a couple years, you'll recoup in 3 more, or a total of 7 years. The reality of it, is that its a bit higher, because of time value of money, but were simplifying a bit here anyway.

Of course, for a lot of people, it wouldnt matter if the figure was 7 months, 7 years or 7 decades, they'd still want to go. Why? Well, of course we put a utility on changing jobs. To put it differently, in fact, the function we could use to define how much you are willing to pay to change careers is defined by the utility U() of a new job.

Thus, the price you are willing to pay for a new job can be defined as :

U(new job) - U(old job)

That is, the utility of your new job minus the utility of your old job. As it turns out, if you stop and think about it, this is the function that defines how you decide whether or not to go to school.

If U(new job) - U(old job) >= 0 , then you attend an MBA program.
If U(new job) - U(old job) < 0, then you don't.

Understand that the function U can be in whatever units you want - dollars, penguins per yard, whatever. Just define the areas that matter and quantify each (this is hte hard part that economists must do). So, in my case, I define my Utility based on:

Vacation
Pay
Interest Level
Long term prospects
Overall enjoyment of position
Cost

I can weigh this to create a personal function.

.10 Vac + .20 Pay + .30 Interest + .20 Long Term + .10 Overall Enjoyment - .10 Cost

So how do you work with this function when pay is in dollars, and interest level isn't? Easy, you just ask yourself, how much money youd be willing to part with to have a job that is interesting, how much for one with long term, bla bla.

So going through this excercise would get you to a defined value of utility for your MBA.

If however, you want to simplify the whole thing, we can just say that U(X) varies with V, P, I, L, O (variables above) where each variable is +, except C which is -ne. Thus, if v is constant between U(new) and U(old), but P increases, as does I and L and O, though C increases with a -ne effect, then the question becomes by how much does C have to change to offset the increase in P,I,L,O ? Well, PILO is .8 of the equation, C is .1 of the equation. Thus, C must be 8 times PILO to negate the effect of PILO assuming an even distribution across PILO.

Needless to say, .1 of $80,000 isn't much - the pay value alone of the mba exceeds that. Even if we talk about .1 of 260,000 were talking -26.

So now we know:

U(new job, V,P,I,L,O,C) > U(old job, V,P,I,L,O)

ARGH !@(#!(@# I need a smoke. Ok screw the rest of this proof. Thus, an MBA is worth it. This of course depends on your own personal utility curve but the point is not what the total actual cost of an mba is - no one cares.

And this is really how people make their decisions - not based on some arbitrary payback period.
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 [#permalink] New post 02 Mar 2007, 18:07
rhyme wrote:
kidderek wrote:
I wouldn't count opportunity cost, it is bogus. Why would you include two years salary when you're not working during those two years? The only debt you incur is the bottom line. If you slum it, you can pay off the 80k within a few years and you're golden.

Of course, that's if you're single or attached to someone who is independent.


You need a course in economics and finance :)

Because its a real cost, not an imagined one. Thats actual money you wont make, so its a true cost of attendance. Put it this way - if you are a contractor and you make $50 an hour, and you take a week off work to go on vacation, what did that vacation cost you? Did it cost you the flight ticket and hotel, or did it cost you the flight ticket, hotel, and $50 * 40 ? Hopefully you realize its the latter.


I can argue (since I can't think of nothing else to do right now) that you should probably cost differently the vacation in this case. Let's consider the contractor: "the machine". Now let's consider that this particular machine needs some 3 days yearly maintenance (in the form of vacaction) to keep functioning properly throughout its "design life" (till retirement). If that were the case, you should probably cost $50 * 16 as the opportunity cost, instead of the full price.

Likewise, I can argue that if you've thought of the MBA but fail to go for some reason, you may not be as productive. Let me explain:

a) Normal cash flow: 100, 105, 111, 117
b) Disfunctional cash flow: 100, 100 (no raise), 70 (changed jobs), 90 (2nd job pays less).

(a) is a person who is happy with his current situation and progress and invests energy into progressing steadily in his current path

(b) is a person who has chosen not to go for an MBA coz he finds the ROI is not worth it. After some time, this person starts wondering "what if", etc. (s)he is bored of (her)his job and misperforms, while "sighing" about (her)his lost dreams. Loses the job, switches jobs, etc.

To conclude: cash flows are a way of analyzing one aspect of the MBA experience, just that.

I'm way overdue for an "enthusiasm shot" which I can get by doing an MBA. If I fail to get this shot, I won't be able to keep up my current income level. I'd get bored and quit anyway.

Cheers. L.
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 [#permalink] New post 02 Mar 2007, 19:35
Couple of reasons I would be suspicious of these "average salary" numbers...

1. Are they base reported salaries...? I don't know how many people I have spoken to on Wall St who make 100k base and get hundreds of thousands in bonus. Their base salaries are a fraction of total compensation.

2. Ok... what about corporate finance people and old industry people? As someone who speaks to a couple of hundred such people every week about their incentive stock plans, I can tell you right now that if you are not considering these plans than you are not seeing the forest for the trees either. RSAs, RSUs, stock options, value appreciation rights, blah, blah, blah... Money all over the place and none of it is salary.

These numbers don't even begin to touch total compensation. Even if you were to say report taxable income rather then salary (which would be reflective of RSA vesting and option exercise... for the execs you wouldn't be looking at things like defered comp plans, options that you can exercise into non-qual defered comp plans, etc...

These numbers can stir some braincells perhaps, but trust me... there will be more money out there in all sorts of non-salaried ways that you are probably not recieving now.
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 [#permalink] New post 03 Mar 2007, 05:54
lepium wrote:
kidderek wrote:
I wouldn't count opportunity cost, it is bogus. Why would you include two years salary when you're not working during those two years?


I second this. I think some of us will agree that even if the MBA's effect was neutral from an ecomonical point of view, we would go anyway for several other reasons, including, but not limited to, not working for 2 years.

Cheers. L.


Even I would Love to second this as it would reduce the payback time of MBA :))
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 [#permalink] New post 03 Mar 2007, 10:31
Compensation at higher levels is a lot beyond reported gross salaries. If I were to calculate ROI based on a linear progression, I should not even be bothering to do MBA because of the so called "opportunity costs"

A few things are intangible - like the experience, alumni network, and simple the fact that we may want to do it for the knowledge. One of the other factors that is completely missing from ROI calculations is "opportunities." How would you calculate payback of starting a successful business with a few good classmates? How would you calculate returns on being able to do well in your business, marketing or account management job because you had good contacts from your alumni in higher positions in your target companies?

A lot of monetary calculations are hidden - and some are discontinuities (stock grants, profit payouts, bonuses, perks, chances to work in tax-free regions and so on). If we were all to look at a good MBA returns purely based of annual gross salary increases, it would not make sense to a lot of us.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 17 Feb 2011, 18:13
I believe in my case payback will take 4-5 years.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 17 Feb 2011, 18:24
Wow back from the dead...almost 4 years later. I will let you know in 4 more years how my loans are doing haha.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 17 Feb 2011, 18:29
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Wow, from the dead! Surprisingly, my payback was under 2 years.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 18 Feb 2011, 02:51
rhyme wrote:
Wow, from the dead! Surprisingly, my payback was under 2 years.


2 yrs is awesome...i am sure u got good schol at Chi... :-D
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 18 Feb 2011, 19:47
kt780 wrote:
rhyme wrote:
Wow, from the dead! Surprisingly, my payback was under 2 years.


2 yrs is awesome...i am sure u got good schol at Chi... :-D


$0 scholarship unfortunately.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 19 Feb 2011, 03:53
in light of that 2 yrs pyback sound amazing...

rhyme - i have sent u a pm...request u to pls chk the same whenever u have some time...
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 04 Sep 2011, 00:42
Now need to do some calculation after going through this
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 04 Sep 2011, 07:50
The thing with all the payback is really simple. You get your mba and graduate at lets just say 30 for simplicity (implies starting @ 28). You will most likely work for the next 20-30 years and that still would be retiring before the "norm" of 65. If it takes you even 10 years to payback the MBA.. the additional 10-20 years of increased opportunity and salary that will most likely come with your MBA will all be "gravy". While lots will argue you can achieve the same overtime with just your undergrad... I would argue that to an extent outside banking. My current company (Fortune 20) doesn't require MBA's for progression or promotion to senior management or executive levels, however, the pay difference between two people doing the same job... one with mba and one without... is around 20K/year. So, assuming I was staying here after mba (I plan on heading consulting), I would be looking at a roughly 20K/year * 30 years or 600K of just pure "salary" difference. When bonus % is calculated off a larger base, that of course starts to add up. Let's say 25%.. that's an additional 5K or 150K over the same period.

True value of MBA for me is career switching. I've done the corporate finance grind and realized it wasn't for me... now I want to leverage it and add that MBA to make myself competitive in the areas I want to work. I do think with discipline and moderate spending habits I should be able to make a 5 year payback (assuming 150K total debt).... if I was in IB at a BB.. I expect you can handle that in 3.

Just my thoughts on the topic... your mileage will vary.
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Re: What is The average time to recover $$$ investment in MBA [#permalink] New post 06 Sep 2011, 11:07
Well, for monetary compensation we all can more or less agree on uniform system of measurements.
I am wondering how to estimate non-monetary values, i.e. how happy are career switchers with their new opportunities? The problem of any forum is that you only read success stories, i.e. 'Took GMAT after 10 min preparation and got 790', 'Got IB job after attending Alaska Fish and Management university' etc. It'll be interesting to hear impressions of ex-students (Rhyme, Riverripper) on how are their classmates doing? How many are happy with their jobs? How many got promotions? Etc - all the soft benefits (or losses) of having an MBA.

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Re: [#permalink] New post 02 Apr 2013, 08:02
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rhyme wrote:
It seems like everyone is looking at this exclusive of opportunity cost. If you stop and think about it, an MBA for $100,000 doesn't cost $100,000. It costs you $100,000 plus two years salary. For some people that might be another $20,000 (indian IT maybe), for some it might be another $100,000 (junior analyst in the US), for some it might be another $200,000 (senior analyst in the US), and for some the opportunity cost might be more like $300,000 (Ibanker).


Hi rhyme,
Just curious-are all these stats based on 2 year pre-MBA salary?
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Re: Re: [#permalink] New post 03 Apr 2013, 01:35
debayan222 wrote:
rhyme wrote:
It seems like everyone is looking at this exclusive of opportunity cost. If you stop and think about it, an MBA for $100,000 doesn't cost $100,000. It costs you $100,000 plus two years salary. For some people that might be another $20,000 (indian IT maybe), for some it might be another $100,000 (junior analyst in the US), for some it might be another $200,000 (senior analyst in the US), and for some the opportunity cost might be more like $300,000 (Ibanker).


Hi rhyme,
Just curious-are all these stats based on 2 year pre-MBA salary?


Well, until Rhyme replies:

These are stats based on your pre-MBA salary. If you matriculate in 2013, then the number being talked about here is the salary you earn in 2013. That (+ expected raises) would be your opportunity cost for the 2 years that you are studying.

P.S: These are random numbers and not from some employment report.
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Re: Re: [#permalink] New post 04 Apr 2013, 09:14
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jumsumtak wrote:
debayan222 wrote:
rhyme wrote:
It seems like everyone is looking at this exclusive of opportunity cost. If you stop and think about it, an MBA for $100,000 doesn't cost $100,000. It costs you $100,000 plus two years salary. For some people that might be another $20,000 (indian IT maybe), for some it might be another $100,000 (junior analyst in the US), for some it might be another $200,000 (senior analyst in the US), and for some the opportunity cost might be more like $300,000 (Ibanker).


Hi rhyme,
Just curious-are all these stats based on 2 year pre-MBA salary?


Well, until Rhyme replies:

These are stats based on your pre-MBA salary. If you matriculate in 2013, then the number being talked about here is the salary you earn in 2013. That (+ expected raises) would be your opportunity cost for the 2 years that you are studying.

P.S: These are random numbers and not from some employment report.


jumsumtak-Thansk for the response!

I know rhyme talked about pre-MBA salary here...what I wanted to clarify is that whether these data represent 2 year or 1 year pre-MBA salary...!

So,from your reply I suppose that this data go with 2 year pre-MBA salary in general...

BTW,$20,000 in 2 year for Indian IT back in 2007(as rhyme posted about then)-quite accurate on an average I would say :)
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Re: Re: [#permalink] New post 04 Apr 2013, 13:03
Just wanted to add my 2 cents on this thread.
I have been working for almost 8 years and make a very good income even by US standards. Mentally I have done the whole financial analysis and it probably will take me 5-6 years to break even (we are BOTH doing MBAs and both from top 10) .
But after working in a corporate environment for this long, in two top companies I strongly feel this is a good time for me to go back to school and broaden my perspective and skill set. Going to B-school is a stepping stone in the right direction for me and it will make me happy in the long term. I might not be rich at 35, but if I am happy and am doing what I like that makes more sense to me. The very question of how soon you would break even is a tough one and though we all want to do an analysis before we take the plunge into a top MBA program, I am sure none of us will let the answer to this question be the main reason behind our decision.

Good luck to everyone!
Re: Re:   [#permalink] 04 Apr 2013, 13:03
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