Tuesday, January 18, 2011

The Value of an MBA

Naturally, being the nerdy business student that I am, I calculated the risks and NPV (net present value - essentially the values of future cash payments minus the current amount which must be shelled out) of an MBA before I took the plunge to head down to Virginia. It was a very important calculation for me, given that student loans for international students had outrageous interest rates, the job climate was inhospitable, and the risks of investing in an education without getting a payback were very real.

As I was chatting with a friend from undergrad over break who is thinking about doing an MBA in a few years, also wondering whether going down to the US for an MBA is worthwhile, I told her about all my analysis, and she suggested writing a blog post about it. So here it is... a few different ways to look at the value of an MBA.

First... calculate the NPV of the increase in salary garnered by an MBA. Take the following assumptions:
  • If you consider that the average salary of a student pre-Darden is $50,000 (pulled from this oh-so-reliable source), and
  • the average salary coming out of Darden is $102,000 (pulled from the 2009-2010 employment report), and
  • the average age at graduation is 30 years old,
  • you can calculate the difference each year between a salary that starts at $50,000 (no MBA) and a salary that starts at $102,000 (MBA), each growing at 2% (in this case, the difference in the first year would be $72,000; in the second year the difference would be $53,040).*
  • Over 25 years (assuming early retirement at 55), at a 10% discount rate, this value comes out to over $550,000.
  • For an international student, the cost and fees comes out to ~$100,000, plus $100,000 in lost salary.
  • The NPV of an average MBA comes out to over $350,000.**
  • Technically, this is a really conservative estimate, since most people who do MBAs tend to get salary increases higher than the rate of inflation. Also, if you consider that at 25 years out, the no-MBA salary is $80k and the post-MBA salary is only $165k, the differences in salary likely increase more with an MBA.
Another way to look at it would be to look at the payback period (for loans or "opportunity cost").
  • If you take the above assumed costs as the loans required for an MBA ($200,000... though this would be on the high side!)
  • Pay them out over the remaining life of the career (25 years)
  • And assume an interest rate of 8%
  • You are looking at paying back around $20,000 annually in loan payments. Thus you could land a job at only $70,000 to "break even" with an MBA and essentially live the same lifestyle you had before doing an MBA.
  • Note: To pay back the loans in only five years, you would need the average MBA salary of just over $100k.
Anyway, the math is crude, but I know when I did the calculations, it made sense for me to take the risk. Without divulging any personal details, I figured that at the very least, my old company would likely take me back at a rate that would sustain my loan payments.

And of course, the other drawback of trying to quantify the value of an MBA is that it doesn't take into account the intangibles: the opportunity to meet international students, go on courses that are taught internationally, get exposure to companies who never would have looked at me before. Plus there is the value of the Network... which in some ways is as intangible as the great friends I have, but in others could be very quantifiable - support in launching new ventures, access to jobs or people to hire, contacts for expertise.

Everyone has their own way of looking at the decision to get an MBA, and I'll admit that it's definitely not for everyone, but for me it was a no-brainer.

*Yes, technically, you would have to grow the pre-MBA salary for two years before comparing it, but since this difference is immaterial, I ignored it.
**Any astute fellow students who have learned about the "flaw of averages" will tell me this is inapplicable, but I figure it represents a fairly conservative estimate of the value.


Anonymous said...

Great post. I definitely agree on the calculations. MBA can be worth it...at least, I hope so!

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