If you read Part 5 of this series, you have an idea of how much an MBA program can cost. Now, we should examine if an MBA is worth the cost by determining what kind of return on investment (ROI) will you get for your troubles.To determine your ROI, we need to examine a few things:
- Cost of MBA program: Once you have decided on which program you wish to attend, you will know roughly how much it will cost.
- Opportunity cost: This is the forgone salary while you attend your MBA program.
- Post MBA salary: Of course, this is an unknown for you, but thankfully most MBA programs keep track of this information for past students. You may be able to make a reasonable estimate.
Example MBA ROI:
As an example, let us assume you currently earn $50,000 per year, and the MBA program you have been accepted to costs $20,000 per year. Assuming this is a 2 year course, you will spend $40,000 on tuition, and give up $100,000 in forgone salary. However, the total cost of your program is not just $40,000, it is really $140,000 because you missed out on your salary for two years*.
Next you take your post-MBA salary and determine how long it will take to make up that $140,000 difference. Let us assume your post MBA salary is $85,000. For easier math, we will say your MBA is directly responsible for adding the $35,000 to your annual salary. With the additional salary of $35,000 per year, you will earn back that $140,000 in 4 years. Although it will take you 4 years to earn back the cost of tuition and lost salary, everything you earn after that is “profit.” This is where your return on investment comes in. To determine you ROI, pick a time period and plug in the numbers.
*For this example, we will assume the salaries will remain constant. Raises and promotions are wild cards and lead to more difficult math.
Example 5 year MBA ROI:
Again, assuming no raises, we can determine a 5 year ROI of $35,000. This is determined by taking your post-MBA salary, subtracting your pre-MBA salary, and subtracting the total cost of the MBA (tuition and forgone salary).
Salary (5 * $85,000 = $425,000) – (5 * $50,000= $250,000) = $175,000
Total cost of MBA (tuition and forgone salary) = $140,000
Total ROI = Salary – Total cost of MBA = ($175,000 – $140,000) = $35,000.
For 10 years, we get $850,000 – $500,000 – $140,000 = $210,000.
This is only a rough way to determine your ROI because it does not take into account raises or promotions. For a more complete way to calculate ROI for an MBA program, check out Forbes online MBA calculator.
Which MBA Programs have the best ROI?
Many MBA ranking systems, such as BusinessWeek or US News, include details including pre and post MBA salary, cost of tuition, fees, and expenses, average time to pay off student debt, and other information that will help you determine how much it will cost, how much you might earn upon graduation, and how long it may take to pay it off. Keep in mind, these numbers are only averages.
Sometimes the best ROI is not where you think it might be.The Graduate Management Admission Council (GMAC) published this document, Examining the Value Added by Graduate Management Education, which mentioned the ROI for a top 10 school is dramatically lower than other schools. It is interesting to examine where the best deals for an MBA can be found.
Is an MBA worth the investment?
In many cases, getting an MBA is definitely worth it. Is is worth it for your situation? Only you can answer this. In my opinion, a decision as big as this requires more than just an examination of dollars and cents. How badly do you want an MBA? Is an MBA necessary for your chosen career path? Can you afford to take time away from work? Sometimes the raw numbers don’t give you the best answer for you. After all, the best investment you can ever make is in yourself.
ROI is just one thing to consider when deciding on an MBA program. Stay tuned for the next article in this series, Other Deciding Factors for Choosing Your Program.
Here is the rest of my series on selecting an MBA program:
- How to Choose and MBA Program
- Part 1: Do You Need an MBA?
- Part 2: In-Residence MBA Programs
- Part 3: Distance and Online Learning MBA Programs
- Part 4: Importance of Business School Rankings
- Part 5: How Much Will an MBA Cost?
- Part 6: MBA: Return on Investment
- Part 7: Other Deciding Factors for Choosing Your Program
- Part 8: Applying for an MBA – (Series)