Calculating Return on Investment (ROI) of doing MBA

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Numerous questions pop up in the mind when one is considering an MBA degree. Most of them revolve around the value that it would add to the professional as well as the personal life of the candidate. While the questions and reasons for opting for an MBA course may vary for many people, there is one aspect of doing MBA that crosses everybody’s mind, at least once. It focuses on the monetary aspect.  Read on to know more.

If you are considering going for an MBA degree, these questions must have bothered you sometime or the other.

  1. Is it better to take the step from overall stand point including the financial angle, or,
  2. It is not worth the effort and cost

Let us address these questions so that you can direct your thoughts and take the best decision.

Due to rapid advances in computerisation, means of communication and faster modes of travel, the whole world has virtually shrunk. In today’s world of cut-throat competition only the best would survive, sustain, grow and flourish. In short, it is a time where ‘SURVIVAL OF THE FITTEST’ would best describe the business world.

If you hold a graduate qualification and are employed in a good job, you would naturally be thinking whether it is better for you to take another leap by joining MBA and look towards a better future. It is presumed that you are financially in a position to sustain living expenses as well as college fees and other educational expenses, since study loans are easily available. The decision involves two aspects. One is of prestige, status and social standing and the second is purely economic / financial in nature. Both aspects need to be considered.

In fact, both aspects add up in calculating the Return on Investment (ROI) of doing an MBA. Let us first understand what we mean by ROI. Whenever a person invests any money and other resources in a business or any other venture, he would be expecting good rate of return on his investment. For example, the simplest investment is to purchase government securities which provide safety and reasonable rate of return. For any other types of investment, one needs to forecast returns over the entire project period and calculate the rate of return, which ideally must be attractive and much higher than that achievable in government securities. So, the return on investment is the quantified benefit that would be achieved on investment.

Let us first consider the economic aspect. Fees and expenses involved in different institutions vary in a wide spectrum, so is the value of their degree in terms of employment potential, i.e. opportunities and options. We need to calculate the rate of return on the investment being contemplated. The investment includes all the expenses to be incurred during the study period and foregoing the opportunity of the existing job remuneration.

Several studies and surveys have been undertaken mostly in western countries to arrive at an approximate ROI on the expenses. Most of these studies have focussed on determining the payback period to recover your investment. This is short sighted view. An average-ranked institution may be able to provide a shorter payback period, but may not provide larger benefits in the long run. The option of not taking up MBA may look attractive since no expenses are to be incurred while the existing income continues. So we need to look at the entire working life span of the person. Let us consider an example to illustrate the concept;

We consider the following:

Age of MBA aspirant: 25 years

Retirement age: 65 Years

Interest rate: 5 percent

Present Annual Salary: Rs 4 lakh (assuming he/she is working)

Suppose the aspirant decides not to do an MBA:

Without MBA degree total salary expected:

Rs 4 lakh and growth of 6 per cent per annum.

Analysis of Cash Flows (without MBA):

Initial Cost = Rs 0 lakh

Cash Inflows = Growing annuity of Rs 4 lakh for 40 years with growth rate (g) of 6%

= Rs 1,84,41,672

Suppose the aspirant decides to do an MBA:

Education Expenses:

Initial Cost for doing MBA = Rs 40 lakh at current level (say)

Present Annual Salary: Rs 4 lakh (assuming he/she is working)

With MBA degree salary expected after completing MBA course:

Rs. 12 lakh and growth rate of 8 per cent per annum.

Analysis of Cash Flows (with MBA):

Cash outflows:

Initial Cost = Rs 40 lakh at current level

Foregone Salary for two years = Rs 4 lakh + Rs 4*(1+0.06)/1.05 lakh

= Rs (4 + 4.04) lakh = Rs 8.04 lakh

Cash inflows:

Growing annuity of Rs 12 lakh for 38 years with growth rate (g) of 8%

= Rs 7,66,72,723/(1.05)^2

= Rs 6,95,44,420

Gain = Rs 6,95,44,420 – Rs 40,00,000 (Cost of MBA) – Rs 8,04,000 (Foregone Salary)

        = Rs 6,47,40,420

 Calculate-Return-on-Investment-for-LMS1 

So we can see here the comparison for entire working life;

Case Income Expenses Gain
No MBA Rs 1,84,41,672 0 Rs 1,84,41,672
MBA Rs 6,95,44,420 Rs 48,04,000 Rs 6,47,40,420

From the above table we can see that financial gain from doing MBA is Rs 6,47,40,420 which is quite impressive and almost Rs 4.63 crore higher than the person who does not do MBA.

It is quite obvious that going for MBA from a reputed institution is a better choice for the individual.

The main issue is to predict the likely growth in the present employment. Also the starting salary and the growth rate potential expected after the MBA qualification need to be estimated. These figures can be assessed based on data provided by the institutions, published data and one’s own experience through the contacts and networks.

Now, let us look at the second aspect of prestige, status and social standing. If we see two people introducing themselves as follows;

1) I am a BA/ Bcom/ BE/ other graduate and MBA from ICFAI Business School (I.B.S), Hyderabad, one of the premier B Schools in India.

2) I am a BA/ Bcom/ BE/ other graduate

We can see that the pride that is added to one’s life is immeasurable in the first case and it will have a lasting impact for the entire life span of the person, professional or otherwise.

Next, let us look at the aspect of the social benefits. If you are unmarried, you may attract a spouse of higher stature; your children may feel proud of your achievement. There will be cascading effect and your children may excel in their respective professions as well. On the whole, you may enjoy a higher standard in all aspects of personal and professional life.

Now we come to the most important aspect of quality of professional life. You would be preferred for positions of higher responsibility involving more skills, responsibility & imagination. Your views and inputs will be considered and can have a great impact in the organization’s decision making process.

These aspects cannot be quantified and these benefits are in addition to the financial gains worked out above.

So, the punch line is;

Decide to go for an MBA degree and select a good institution for the same in order to obtain long term i.e., life-long benefits.

Contributed by Sumit Gulati (Batch 2007-2009,IBS HYDERABAD)

5 thoughts on “Calculating Return on Investment (ROI) of doing MBA

  1. who will calculate mba investment of Rs. 40lacs plus accrued interest on that over a period of 40years

  2. Can you please make me sure that is there now any expended date for applying in ibs.

  3. sir ,being a student of bsc Chem hon’s should I pursue MBA further?

  4. I am a BMS graduate with 1 year experience in Motilal Oswal as an Equity Advisor, I am planning to do MBA in Finance from IBS hyderabad but my concern is the fees which is 15lacs and the Avg. Salary is 6-7lacs for the pass outs, also there are 200-250 students who are not even placed in the earlier batches. So, my money will be at risk is what i feel…Do you think its worth paying a huge amount looking at the ROI???
    Please revert ASAP.
    -Sneha

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