Everyday I feel like another one of my friends is considering doing an MBA in the near future. It got me thinking about why people do them and if they even should do a MBA. Briefly, I’m going to explore some reasons for doing a MBA, describe why I chose to do one, and then go into my fast and crude analysis on if it’s worth it to you from a financial perspective.
One of the biggest lessons I have learned in doing the MBA is that it gets harder to do one the longer your wait to start. The hardest part of the MBA is not the MBA itself. It is the time management process of juggling your schoolwork, career, family, and social life. Throw CPA, CFA, or some FINRA Series exam on top of that and you got yourself some stressful months ahead.
Why do an MBA?
Career Change – Many of my peers chose to do their MBA in order to launch into a new field. I recall one student who had a 20 year career in IT and was now wanting to go into clean energy. Usually you see engineers looking to move to finance or something radical. I think the most value a MBA has in this category of changing careers. It gives you enough times to get the course work and to network with others in the industry you are looking to get into.
Launch a start up – For those looking to start their own business or find partners to start something, the MBA is absolutely for you. Most MBA programs have elective courses geared towards start ups. Georgia Tech has three in particular: Venture Creation, E-commerce, and Entrepreneurial Finance. Most professors serve as great advisers for would be entrepreneurs as well. I have seen many willing to help students in any way they can whether it be themselves or through their network.
“Checking the box” – I put everyone looking for a raise and promotion in the box. I have yet to meet a MBA graduate who did not get at least a raise or a promotion if not both. In addition, those students wishing to look more employable to employers fit this bill. Hell every job description on indeed these days has “MBA desired” or “MBA preferred.” The MBA makes it that much easier to both get those initial interviews and change employers with ease.
But is the MBA actually worth it?
Day after day we see commodity prices, health care premiums, auto, homeowners, life and other insurance premiums keep going up. Colleges are no exception. My tuition alone starting in Fall 2009 was $727 per credit hour. It increased each year so far and is currently at $917 per credit hour. That is a 12.3% CAGR (compound annual growth rate).
Alice in Wonderland had it right: “I wonder if I’ve been changed in the night? Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!”
This got me thinking that for poor freshmen starting MBA that they’re going to be paying a lot more than I did. Time to run through the numbers to see what I spent on my MBA and to see if it is even worth it. Click here for my analysis on the MBA. When I finish, I will have spent over $51,062 on this degree. Someone pinch me! @$%^! Given the way tuition rates are going, you would think people would not flock to the degree. Many news articles out there will show you that MBA applications are up. Sitting in a cube and seeing the fantastic 9% unemployment numbers, many decide to protect themselves and be more employable by going for that M-B-A. Now it is time to see if it is even going to be worth it given these tuition rates.
I decided to do an IRR analysis which I am biased to because we use it in investment banking a good bit. Yes it is not perfect and no analysis ever is. Critics may argue that I was too conservative for leaving off anticipated bonus payments, but I wanted to be conservative and only looked at salary expectations. To run through an example, Peter Gibbons a student at Georgia Tech is graduating. He makes $65,000 at his current job doing TPS reports. After going through OCR (on campus recruiting, yea you learn lame acronyms in MBA), Peter gets his Post-MBA offer to make super TPS reports at a rival company but he gets a fat $20,000 raise and is now making $85,000. The GT career office shows that $85,000 is roughly the average salary for our graduates so this example has some real merit. The purchase consideration is equal to what I paid for school and those classmates who started with me. I assumed a 5% annual base increase which is not great but it not terrible neither. A 20% tax rate is reasonable based on some numbers I ran on a napkin using the 2011 Tax Table by the IRS. Since we make money almost forever, I did a terminal value of 12x. Feel free to change the assumptions and see what IRR results. In our example, Peter hit a 10% IRR. Not too bad given the returns on savings accounts these days. Given that tuition is going up each year, current freshmen are projected to finish at around a $65,000 cost. Plugging that in drops the IRR to 4%. Sure I’m leaving out bonuses, and it is probably higher. What the model suggests is that a MBA is a deal right now and is worth it. HOWEVER, if costs go too much further to where a tech MBA is $70k/80+ it starts to get to be pretty ridiculous.
Based on this, I am thankful to be wrapping up and graduating in May 2012. Screenshots of the example are shown below:
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