Rotman To The Core: The Value In Calculating The Net Present Value Of An MBA

The text came to my phone as I was walking home from class. It was from my good friend back in America, who was also assessing her future trajectory and was looking to me for advice.

Do you think an MBA is worth it?

I smiled and texted back, “Boy, do I have an exercise for you.”

It’s actually an exercise that every student had to do before our very first Finance class. It seemed simple enough: Determine the Net Present Value of obtaining your MBA. Net Present Value (also known as NPV) is a financial metric used by analysts and managers to evaluate and compare various monetary-related projects, bonds, and decisions, which allows them to identify the most value-generating options.

In other words, I had to calculate if our MBA was worth it – at least from a monetary standpoint.

To find the NPV of my MBA, I first calculated the Present Value of all the money I’d earn with an MBA – which showed me the current worth of that money – and the Present Value of all the money I’d earn without an MBA (again, showing me the current worth of that money). Then I compared one number to the other by subtracting the Present Value of my lifetime earnings without an MBA from the Present Value of my lifetime earnings with an MBA.

PV_MBA – PV_{No MBA} = NET PRESENT VALUE OF HAVING EARNED AN MBA

If the NPV was positive, this indicated that earning an MBA was expected to result in more money over the course of my life, compared to not pursuing the degree. And if my NPV was negative, then that suggested that continuing my career without an MBA would have been the better financial choice.

For someone like me who doesn’t have a background in Finance, it was an eye-opening project. While it personally took me three hours to do – and I had to do a lot of soul-searching about the assumptions I’d made and what that meant for me – I found it illuminating about how my future would unfold in undertaking my MBA.

In some ways, I wish I had done it before I ever applied business school because of the insights it gave me.

I believe this is a great exercise for any prospective student to do before embarking on an MBA program. Not only is it good for you to estimate the value that an MBA will bring to you, but it’s also practice for making financial decisions at a firm.

WHAT TO CONSIDER IN CALCULATING YOUR NPV

This is a very general list of everything that may go into calculating the NPV of a potential MBA, which I believe shows all the considerations that you have to make. For exact instructions on calculating an NPV, I’d suggest finding instructions online.

First, create a column for each path in your life in order to do the Present Value of each: All your assumptions and considerations for life with an MBA and all your assumptions and consideration for life without an MBA. For every item on your lists, you’re going to extrapolate that into the future until you retire, and you’re going to assign a well-thought-out monetary value for each item, accounting for items such as inflation and raises.

It’s easiest to start with big-ticket items like MBA tuition, lifetime salaries of what you’d make with and without an MBA, and the (hopefully big) increase in wages after you graduate. Then consider what salary you would be giving up in taking two years to do your MBA – and don’t forget that you’d also forgo any raises or promotions that you may have gained during that time. Be sure to figure in income taxes for each path as well.

From there, you keep estimating the inflows and outflows of your cash and investments for both paths and adding to your lists.

For instance, the cost of living may be more in the city where you go to school. What will rent be? Will you drive a car during that time? Will you even own a car? What is the cost of food? How many trips will you take to go back home?

Then there are other costs to consider as well: relocation, travel, medical, school books, insurance, and more. You may even cancel subscriptions like Netflix to save money as a student.

But then you think beyond the degree, too. When do you expect to buy a house and for how much (and would that house be nicer with an MBA versus not?)? How many cars will you buy in your lifetime? Tuition for kids, investments, vet bills if you have a pet – the list can go on-and-on.

Finding your NPV can be as simple or as complex as you want. Our professor only expected us to do salaries and the costs of tuition, but some of us went even further. One student even considered how his student discount would help with public transportation and grocery shopping.

Obviously, the more assumptions that are put into the exercise, the more uncertainty that goes into NPV. You may be totally off-target in guessing what your salary or your mortgage will be. That’s okay – this is an estimate that gets your brain working to see to impact of such a massive undertaking like getting your MBA. The more you put into it, the more value you’ll get from these calculations.

Below is a very simple table showing you what this looks like with sample numbers. I’ve only done the calculations for Salary and Tuition for ten years. I’ve made several assumptions with this simplified table as to what this student would be making after graduation and how much each yearly raise will be.

Depending on how complex your calculations get, your spreadsheet will look a lot different. And that’s why it will be invaluable to you.

WHAT MY NPV SAID ABOUT MY MBA

After doing this exercise, I had a robust estimation of what life would be like – almost an “It’s a Wonderful Life” look at life with and without my MBA. It had a lot of assumptions that may very well end up being false, like my starting salary leaving school or the raises I would get based off that starting salary. However, it did help me think through everything that my MBA journey would impact.

Here’s the thing though: My NPV ended up being slightly negative. Meaning, that with all of my calculations, it looked like I would make more money if I didn’t pursue my MBA. For most financial analysts, that would be an immediate rejection for a project. As I was coming into my MBA with thirteen years of experience, I already had a pretty good salary and title, which impacted my numbers more than other students.

I wouldn’t change a thing though. I’m learning, bettering myself, and I’m getting closer to my family as we explore our new surroundings. I’m having fun and the future seems bright. It doesn’t make sense from a financial sense, but it doesn’t have to. There are some things that you can’t put a price tag on. And because this is all based on assumptions, my NPV may very well end up being positive. I feel like I’m prepped for that to happen.

If you’re considering doing an MBA, I highly recommend calculating your NPV. There are a lot of resources you can find online to help you (Luckily, Rotman runs workshops prior to the start of class that helped me with my NPV). You’ll be glad you did. And if your first Finance homework is this exact same exercise – you’ll already have it done.

And as for my friend who texted me, asking if I thought the MBA was worth it? After talking her through the process and discussing all of her own assumptions for her NPV, she understood.

Yes, it’s worth it.

Erin Gulyas has been fascinated with stories ever since her Barbie dated her Swamp Thing action figure when she was three years old. Since then, she has turned this passion into telling stories for brands and companies to better connect with consumers. She comes to the Rotman School of Management at The University of Toronto with 13 years of experience in advertising and marketing. After graduating with a Bachelor Degree of Science from the University of Texas at Austin in 2009, Erin completed a Graduate Diploma in Advertising Creativity from the Auckland University of Technology.

She has worked as a copywriter at lead advertising agencies and companies in both New Zealand and America. She last worked for Blue Shield of California as the Senior Manager of Content and Communications, where she oversaw six writers and three digital media specialists to create 4000+ member-facing communications per year. In her spare time (what little there is), she’s a New York Times bestselling author when she’s not wrangling her two young children.

You can find her on LinkedIn, and if you like Star Wars, we’re already best friends.

DON’T MISS: ROTMAN TO THE CORE: WHY I DECIDED TO GET MY MBA (AT AGE 36 & IN A DIFFERENT COUNTRY)