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02 Mar 2007, 17:52
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kidderek
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.
02 Mar 2007, 19:07
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rhyme
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.
02 Mar 2007, 20:35
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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.
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.
