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.

Experience, Advice and Social Networking

Yes, two blogs in one day. That's what happens when I've got lots on my mind and chose to eat my lunch from home rather than going out with all my co-workers.

Anyway, I've come to appreciate the value of social networking more than I ever thought possible over the last few weeks. I've also come to learn just how valuable our experience is, simply as experience and not as expertise.

Rather than launching into a long expository, I'll just give some examples.

• The BusinessWeek website has a forum for MBA students. While in recent weeks, this site temporarily lost much of its usefulness, during the height of application season, it was very valuable to me. Not only did I meet people from all over the world, I also gleaned tons of useful information. It was good to hear other people's interview experiences and application tips.
• Being involved on the BWForum has lead to several people writing to ask me advice on various topics. A while back, I got an email asking how the Canadian economy was really doing. (This was before the commodity drop, and I'm still very satisfied with the answer I gave.) Most recently, I got an email from someone who will be applying asking for advice. While I initially thought it funny that someone would ask ME advice, I realized that I do have knowledge having gone through the admissions process myself. As someone who is never shy about giving advice, I realized that I actually had to hold myself back from writing a novel.
• Reading the blogs from the Darden Student Bloggers has been awesome. They've been through everything that I will go through in a few short months, and their insight into the process has been much appreciated. In fact, I can attribute my recent surge in blogging activity to their inspiration! Though I know that I will not be able to escape "Black November," I am starting to think hard about how to keep the main things in my life the main things next year. (Plus, who can forget that I learned about the U2 concert AND found someone to go with through one of those blogs...)
• Twitter... When I first started on Twitter, I thought it was dumb. Then I came across a blog with a link to Darden students, future students and alum and just started following them. Thinking it would be nothing more than the people I was following wondering who the random girl was, instead they started following me and even sending me messages! I've learned a lot just from following their tweets. If I have questions about prepping for student life, I just post it to my profile, and I ALWAYS get a response... usually several.
• Facebook - But of course. Though the value of Facebook has only been slightly marginal in terms of school so far, I am looking forward to being kept informed of the pre-school activities when I arrive in C'ville. I've made several "friends" so far and am getting to know my future classmates.

Anyway... Social networking is, in my opinion, one of the best features of the Internet. I could go on and on about people that I've met through these various forums, but there are just so many stories that they would get boring after a while. (That is, if they haven't already...)

And... having experience makes your information and insight valuable.

Harvard?

Could a Harvard MBA be in my future?

Yesterday I left work early to drive down to Calgary and attend an info session for the Harvard MBA program. I left feeling as though I would really, really like to go to Harvard Business School.

Of course, I am merely average, and most people that get into Harvard are more than merely average. But perhaps if I can up my game, or something, then I will be able to get in. I suppose the first obstacle will be the GMAT (Graduate Management Admissions Test). If I can ace the GMAT, that will definitely improve my odds. Beyond that, if I can step things up at work, then maybe I can get a good reference and some good points to put on the resume.

I don't know why I'm saying this... I imagine it would be all well and good if I got an MBA from any old school. I could secretly apply to Harvard and if I didn't get in (which, to be fair, is a likely outcome) and only got into a good school, then that would still be good.

But I really want to go to Harvard...

One Down, Three to Go

Finished my first final today. Forgot to write my name on it. (All is not in vain, though, as I am 99% sure that I DID remember to put my ID number.)

Finals would be much less stressful if I didn't want to go to grad school one day. I made that decision this weekend. How will I ever be the CEO of a company without my MBA?