Introduction
The number of people who are enrolling for MBA programs has increased from 26,000 to 168,000 between 1970 and 2009 (Mihail & Elefterie 2013). This research paper confirms that pursuing an MBA program is a good investment since an MBA program is a capital asset.
Assumptions
- After completing the program, he expects his salary to increase to $ 80,000.
- It is also assumed that he does not incur the risk of unemployment.
- However, one has to incur the cost of earning a degree in MBA in a university. For instance, he or she has to part with approximately $80000 within 2 years ($40000 in a year). He or she has to incur the expense of time and learning resources.
- The amount that is required to undertake the MBA program can be invested in a bank at a discount rate of 3% (2 years). The discount rate is obtained using the CAPM model. Besides, the current LIBOR rates also concur with the set discount rate (Keown 2004).
The present value of the stream of cash flow [annual cost of the MBA program]
Edward will be required to calculate the present value of the annual cash flow streams, which relate to the annual cost of the program for two years. However, he has to consider the opportunity cost, which is the cost of foregone earnings of 2 years. However, since the program will have the potential of earning him a salary that is higher than the forgone, he is assured of recovering the cost within a short time so that any amount he receives thereafter will be his returns. Secondly, he will be required to calculate the present value of his annual income using the simple cash flow formula CF0 +CF1. However, in Europe and the US, the CF0 may change with time.
CF0= $40,000
CF1= $40,000÷ [1+3%]2 = $37700
Therefore, the total present value of the cash flow streams will be $77700 that is, [$37700+ $40,000].
The present value of income streams
On the other hand, the present value of the income stream of $ 50,000 can be determined using the formula for calculating the present value of the annuity.
In this case, the present value of the annuity will be calculated as follows.
PV of annuity= $ 50,000 A =$95673.48
Therefore, the present value of the cost of the MBA will be $77700 + $95673.48 =$173373.48
Assuming Edward will work for approximately 30 years earning a constant salary of $ 80,000 before retiring, the salary differential before and after the program will be $30,000, viz. $80,000-$50,000. Thus, he expects to gain an additional benefit of $30,000. The assumption is that this figure will remain the same. Over the next 30 years, the present value of the additional benefits before taxation at a discount rate of 10% can be determined using the PV of an annuity formula.
Present value of annuity=$30,000 =$588013.24
If this amount is discounted back two years, it will amount to $554206.64, viz. [$588013.24 ÷ (1+0.03)2]
Consequently, the present value of obtaining the MBA can be obtained by calculating the difference between the present value of the cost of the program and the discounted amount of the present value of the benefits obtained. Thus, the present value of the MBA program is
=$554206.64-$159,834.86=$394371.78
Conclusion: Risks of investing in an MBA
A study conducted by the Graduate Management Admission Council on 4,135 business schools in 2012 showed that over 86% of students had been employed after graduation. The study estimated the risk of unemployment to be 14%. The current analysis has captured this risk. The respondents asserted that they would not have attained new job positions without MBA qualifications. Furthermore, most MBA graduates recoup 100% of their investment in an MBA after 4 years. They double their salary in10 years. Therefore, investing in an MBA is a solid investment (Lavelle 2012).
References
Keown, A 2004, Foundations of finance; the logic and practice of financial management, Qinghua University Press, Beijing.
Lavelle, L 2012, The MBA value? Debatable, Web.
Mihail, M & Elefterie, A 2013, ‘Perceived effects of an MBA degree on employability and career advancement’, Career Development International, vol. 11 no. 4, pp. 352-361.