Updated: December 7, 2020 by FinPins
Every professional who wants to grow in his or her career considers adding an academic credential to the resume. A master’s degree after a bachelor’s degree and 3-5 years of full time work experience seems like the perfect solution to most analysts and entry level managers. Since MBA requires a hefty investment, everyone considering taking the plunge asks the key question – is MBA worth it?
I did my own analysis before deciding on getting an MBA. I took out a huge student loan to get my MBA and then quickly paid it off in 26 months, you can read about it here.
Analysis: NPV of MBA
Here’s the analysis I did prior to deciding on my MBA.
Assumptions and Brief description of terms used
According to Investopedia, the discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. Simply put, this is the rate of return I’d get if I choose to invest my money elsewhere. For the purpose of this analysis I’ve chosen 8% which is the average return I’d expect on investing in S&P 500.
Pre and Post MBA Salary (Net)
I wanted to determine the difference an MBA can make in my earnings potential, and for a more accurate analysis I have used the yearly salaries, net of taxes. Pre-MBA gross salary of $65,000 and Post-MBA gross salary of $120,000 is a fair assumption for a top school in the US.
I have used NY state as an example to calculate the post tax salaries. To customize your calculations, you may use this link.
MBA Cost Year 1 and Year 2
This is the cost of attending an MBA program full time. For some it may require a move to a different city hence changing the cost of living as well. Some may pay the full tuition while some may have scholarship or other aid available. I have used $60,000 per year but this number can vary greatly on a case to case basis.
|Business School||MBA Tuition|
|Harvard Business School||$146,880|
|New York University (Stern)||$145,860|
|Carnegie Mellon (Tepper)||$136,000|
|Emory University (Goizueta)||$127,400|
|Washington University in St. Louis (Olin)||$122,000|
|Georgetown University (McDonough)||$118,200|
|University of Texas at Austin (McCombs)||$109,424|
NPV or Net Present Value is the value of all future cash flows in today’s dollar terms. The discount rate is used to calculate that. You can read more about NPV here.
Pre and Post MBA Increment rate
This is the rate of increase in the yearly salary in both cases. To adjust for promotions and increased bonuses and even stock options as you rise higher, I’ve picked an annualized growth rate of 5% on a job without an MBA, and 7% on a job after an MBA.
- I enroll and start my two year MBA program at the age of 27
- I have $0 earnings in the first year of my MBA
- Due to summer internship, I earn post-tax earnings of $12,000 in the second year.
- Retirement age is 65 years
Taking these assumptions and doing the math, I figured the Net Present Value of MBA from a top B school in US is at-least a million dollars. Besides the monetary gain, an MBA provides the opportunity to hone soft skills, learn alongside really smart people, and build a strong professional network.
So, what do you think – Is MBA worth it?
Please share your experience in the comment section below.
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