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EMBA - Using NPV to Calculate ROI

Marjorie O'Neill, Temple UniversityA Masters in Business Administration (MBA) degree offers a lifelong return on investment.   A student emerges from a leading business school such as Temple’s Fox School of Business with greater options for employment and advancement.  During your time invested in the program you gain knowledge, have experiential opportunities, enhance your network of colleagues, and earn credentials of accomplishment providing you greater marketability.  Unemployment or economic downturns may strike fear when seeing that daunting tuition bill.  Surveys reflect that tuition bill plus forgone salary during a full-time program still pay off.

The Financial Times 2012 ranking of the world’s best 100 Executive MBA programs reports alumni three-year average salary increase ranged between 18%-74%.  The Forbes 2011 ranking survey of top US business schools reflects the median five-year gain of an MBA salary as a percentage of costs to be 46% and payback runs between three to five years, with the median being 3.6 years.Temple University Singapore Executive MBA

Net Present Value (NPV) is a useful tool to help you make an informed decision.  The first step is to derive your net revenue stream by projecting future compensation.  Set a goal of the role you wish to achieve and do some research on the starting salaries for that role based upon location, industry and function.  Your local recruiters can offer compensation benchmark brochures.  This will represent your starting salary upon graduating with your MBA.  The second step is to determine the percentage of increase you could receive per year.  The average salary increase reported by alumni to ranking publications includes annual merit increases, bonuses, stock options, and promotion increases.  If we assume a post-MBA starting salary of $100,000 with an average 12% increase per year, after five years the salary would be $158,000.  Each year the salary needs to reflect the current value of the money, so it is discounted using a factor such as cost of living index.  Assuming a 5% discount rate, the total revenue stream over the post-MBA five years is almost $669,000.  If you did not earn an MBA and were employed, you would have continued in the same level of position with fewer opportunities for higher level positions with their commensurate level of compensation.  Assuming a pre-MBA salary of $65,000 with average annual increases of 4%, during the same years as the post-MBA salary, adjusted for the 5% discount rate, you would have earned $400,000.  Netting post-MBA salary ($669,000) with pre-MBA salary ($400,000) you gain $269,000.

Two factors offsetting this gain are forgone salary and net tuition.   While attending a two-year full-time program, chances are you will not be employed full-time and so the loss of that salary is a cost of your investment in your future.  Your pre-MBA salary of $65,000 for the first year plus projected second year salary calculated using the average annual increase of 4%, and applying the NPV discount rate of 5% results in forgone salary of $139,000.  Tuition costs are calculated using the cost of your program applying the NPV discount rate.  If you need to borrow money to pay for tuition, any loan interest should be added to tuition costs.  Offsetting the cost of tuition are scholarships, employer reimbursements, or gifts.  Assume the cost of tuition plus interest less scholarships or other monies received nets to $50,000 for your program. Forgone salary ($139,000) and net tuition ($50,000) are the total costs $189,000 offsetting your net-salary increase of $269,000 for a five-year MBA gain of $80,000 or a 30% improvement in your personal revenue stream. 

Using this very conservative projection, payback is 4.3 years.  In Forbes 2011 “Best of Business Schools” survey, 86% reported exceeding this 30% gain and 91% took less than 4.3 years to reach the break even point.  The median five-year post-MBA salary was 2.5 times greater than pre-MBA salary, with some as high as 3.5 times greater.

If you were fully employed during your Executive MBA program like students are in the Temple University Executive MBA in Singapore, the forgone salary would not be part of your cost, but it would be factored in your revenue stream.  Calculating your EMBA salary would include two years’ salary at the lower pre-MBA level plus one year at the higher post-MBA salary, offset by three years of salary at the pre-MBA level.  Using the same salary assumptions previously discussed, your net revenue stream is $128,300.  Your expenses are now your tuition costs without the additional cost of forgone salary, $50,000.  Netting your revenue and expenses, results in a 3-year gain of $78,300 or 61% of expenses.  Payback would be about 11 months in your first post-MBA year.

Although we did not take non-economic psychic costs while earning an MBA, there is no doubt that earning your MBA is certainly an investment in your future.  More employers are requiring that extra academic degree for new hires.  They recognize the benefit from the increased knowledge and resources provided by MBA grads.  Economic times are rocky, employers seek who can help them survive the downturns and who can help steer them into excellence.  The MBA program is a tool to help you steer your future to excellence.


Now is the Time to Earn a Fox Executive MBA (EMBA)

Join our next Information Session & Class Preview to learn how the Fox School of Business' top 20 ranked, part time US Executive MBA can benefit your professional and career development.  Intake for the 2013 cohort has commenced with a start date in June 2013.  Scholarships are available.

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