Friday, January 27, 2017

Simple ROI Calculations on MBA


The return on investment (ROI) of getting an MBA is a calculation that roughly predicts how many years it will take to pay off getting a MBA.

ROI Calculation: ((2-year opportunity cost) + (Full program cost)) / ((Theoretical Post MBA Salary-Original Salary))**

**This equation is an extremely basic predictor that leaves out many important variables, such as additional costs of living, and aims to primarily gives you an idea of who should and who shouldn't pursue an MBA from a salary point of view.

Original Salary (USD)40,000.00
2-year opportunity cost (USD)80,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)50,000.0070,000.0080,000.00100,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
0.000.0080,000.001.601.141.000.80
40,000.0080,000.00160,000.003.202.292.001.60
50,000.00100,000.00180,000.003.602.572.251.80
70,000.00140,000.00220,000.004.403.142.752.20
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)
0.000.000.000.00
1.601.141.000.80
2.001.431.251.00
2.802.001.751.40


Original Salary (USD)50,000.00
2-year opportunity cost (USD)100,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)40,000.0060,000.0070,000.0090,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
0.000.00100,000.002.501.671.431.11
40,000.0080,000.00180,000.004.503.002.572.00
50,000.00100,000.00200,000.005.003.332.862.22
70,000.00140,000.00240,000.006.004.003.432.67
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)
0.000.000.000.00
2.001.331.140.89
2.501.671.431.11
3.502.332.001.56


Original Salary (USD)60,000.00
2-year opportunity cost (USD)120,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)30,000.0050,000.0060,000.0080,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
0.000.00120,000.004.002.402.001.50
40,000.0080,000.00200,000.006.674.003.332.50
50,000.00100,000.00220,000.007.334.403.672.75
70,000.00140,000.00260,000.008.675.204.333.25
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)
0.000.000.000.00
2.671.601.331.00
3.332.001.671.25
4.672.802.331.75


Original Salary (USD)70,000.00
2-year opportunity cost (USD)140,000.00
Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00
Salary difference (USD)20,000.0040,000.0050,000.0070,000.00

Program Cost Annual (USD)Full Program Cost (USD)Full Opportunity cost (USD)ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
0.000.00140,000.007.003.502.802.00
40,000.0080,000.00220,000.0011.005.504.403.14
50,000.00100,000.00240,000.0012.006.004.803.43
70,000.00140,000.00280,000.0014.007.005.604.00
Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)
0.000.000.000.00
4.002.001.601.14
5.002.502.001.43
7.003.502.802.00

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So what do these tables mean? Lets look at the 70k table for example.

First, Original Salary is how much you are making now. 

Original Salary (USD)70,000.00

2-year opportunity cost is the cost of going to school for two years without pay (ignoring paid internships).  

2-year opportunity cost (USD)140,000.00

Theoretical Post MBA Salary is just a reasonable salary range that a freshly graduated MBA student might expect, depending on their profile and prior experience.

Theoretical Post MBA Salary (USD)90,000.00110,000.00120,000.00140,000.00

Salary difference is the difference between their post MBA salary and their original salary. 

Salary difference (USD)20,000.0040,000.0050,000.0070,000.00

Full opportunity costs is the sum of the cost of the entire program and the two years of lost salary. The cell values descend according to different program costs.

Full Opportunity cost (USD)
140,000.00
220,000.00
240,000.00
280,000.00

And the ROI portion of the table details how long it would take at various post-MBA salaries to pay back your education when you take into consideration the full opportunity costs.

ROI on 90,000 (years)ROI on 110,000 (years)ROI on 120,000 (years)ROI on 140,000 (years)
7.003.502.802.00
10.005.004.002.86
11.005.504.403.14
13.006.505.203.71

However, if you're mainly interested in how long it'll take to pay back the MBA and want to ignore opportunity costs, Debt Payback would be how long it would take for you to pay your loan back.

Debt Payback on 90,000 (years)Debt Payback on 110,000 (years)Debt Payback on 120,000 (years)Debt Payback on 140,000 (years)
0.000.000.000.00
4.002.001.601.14
5.002.502.001.43
7.003.502.802.00

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Take-aways from the chart.

It's hard to write down any defining, all-encompassing, rules to take away from this exercise because there are so many variables to consider beyond just how much you're making now and how much you might make later.

Just take a good look at yourself and be honest with your abilities. That's the first step to getting any value from these charts. For instance, if you're all around just an unspectacular, but not bad, average applicant, making 70k, and expect to make 90k coming out, it'll take you anywhere from 4-7 years to pay off your education. 7-13 years if you want to consider those two years of not working as money lost as well.

However, if you're making 40k only and can land a full scholarship cause you're amazing, it's essentially a no-brainer to pursue an MBA, especially if it adds value to your career. In almost every case you'll be making money instantly after your first year graduating.

Just remember that most applicants are around 28-29 when they enter and 30-31 when they leave. How old will you be when you finally pay off your loan?

As a reminder, the sheet doesn't take into account whether or not an MBA actually advances your career, whether or not it can actually benefit you, or even the type of job you will get coming out, it simply plays around with salary numbers. It doesn't fully embody the cost of living as well. 
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