You are on page 1of 2

I have been saying this ad nauseam – the reasons to pursue an MBA program have to be

‘individual’. The reasons cannot be generic – what applies to somebody else need not
apply to you. One of the many decisions to make before considering giving up a job to do
an MBA program is financial. It would however be myopic and sometimes silly to take
into account just financial aspect of the benefits of MBA. Life and Career are not straight
lines and cannot be put to a linear regression to understand. The complexity of these
requires that we understand and appreciate all the variables, if ever we can enumerate all
of these variables. Once the variables have been broadly figured out, doing a cost-benefit
analysis is pivotal. Many of the popular magazines and newspapers refer to the payback
period as a measure to appreciate investment in an MBA program. But now that I have
attended one class of Corporate Finance course, I can, with some confidence, say that
payback period approach is flawed and does not capture the time value of money (thanks
to my Prof. who used a similar example).

Calculating NPV of the investment is much better way of analyzing the decision. Of
course, all math and analysis begin with assumptions. Here too we make some
assumptions to be able to start.

I take an example of a person with following variables to explain how the NPV can be
calculated

Age – 27
Present Salary – INR 500000
Age of retirement – 60 Years
Return on alternate investment opportunity, r – 10 %

First, let us calculate the Present Value of the income during the career time when MBA
is not pursued. Let us call this PV (No MBA)

Assume, Expected growth rate of income without an MBA degree – 5%

C1= Current Salary; C1 (1+Gt) = salary during subsequent years; t = 1, 2….32;


Gt=growth rate, which is 5 %

PV (No MBA) = C1+ C1 (1+G1) / (1+r) +…..C1 (1+G32) / (1+r)^32 = C(1+G) [ 1-


(1+G)^32 / (1+r)^32] / [ r – G]

=> 500000 + 500000(1+0.05) / 1.1 +….+ 500000(1+0.05)/ (1.1)^32 = INR 9017000

Let us now calculate the Present Value of the income during the career when MBA is
pursued. Let us call this PV (MBA)

Assume, Starting Salary after MBA, C2 – INR 800000; Expected growth rate of income,
Gt – 7%; Retirement Age – 60 Years;
Cost of MBA at ISB = INR 1500000

PV (MBA) = -1500000 + C2 (1+G1) / (1+r)+…..+ C2(1+G31)/(1+r)^31 = -1500000 +


800000/(1.1) + 800000 (1+0.07) / (1.1)^2+………+ 800000 (1+ 0.07) / (1.1)^31 = INR
15380000

NPV of investment = PV (MBA) Less PV (No MBA) = INR 6368000

Given the assumptions, investment in ISB MBA program is an attractive proposition.


One may alter the assumptions (according to the respective circumstances and
expectations) and calculate the NPV of the investment.

I close this with a caveat – the benefits of an MBA are far greater than financial and I
think a simple NPV calculation cannot capture the essence of such benefits. But, an NPV
calculation will let one put down what one’s expectations from MBA are. It is to be
realized that from the financial angle MBA plans need to be treated as any other financial
investment and need to be put to NPV test. We need to explain to our people – parents or
spouse or anyone else – on why we think this investment is worth its money and time and
why we think they should make some sacrifices today to see a better tomorrow. Through
NPV calculation, convincing them becomes easier – provided the NPV turns out to be
positive and reasonably attractive.

Post Scriptum:

-Seek pardon from readers with non-quant/fin background. But this is the only way to go
about making a financial decision