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Thursday, September 27, 2012

Does a Mid-career Full-time 1-year MBA have a Negative Financial RoI?

Everyone experiences mid-career blues in her career. And one way people (who didn't enter the corporate world with an MBA degree) think they overcome these blues is to get an MBA degree.

Mid-career MBA Dilemma

Since we are talking about a business management course here it is worth assessing whether it makes business sense to get a business degree. What is the likely RoI (return on investment) of an MBA? Does a mid-career full-time 1-year MBA have a negative financial RoI?

Case of Mrs. X - Should She Do an MBA or Not

Let's consider a certain Mrs. X entered the corporate world when she was 25 year old and plans to retire when she turns 55 (hence the career would span for 30 years). After working for 10 years Mrs. X decides to do a 1-year full-time MBA. The big question would be: Does a mid-career full-time 1-year MBA have a negative financial RoI?

Let's assume a few things:
  • Mrs. X will work for 20 years post-MBA
  • The cost of MBA is Rs. 2600000 (26 lacs)
    • It is also assumed that Mrs. X has this readily available in cash and will not be needing an education loan. If an education loan in considered the financial RoI is negatively impacted
  • If the MBA Cost is kept in a bank FD (Fixed Deposit) it can earn post-tax returns at 6% interest rate compounded annually
    • It is also assumed that this money lies in the FD throughout and earns interest on compounded basis year after year
  • The current salary of Mrs. X is Rs. 2400000 (24 lacs)
  • Mrs. X expects to earn 8% salary hike every year
    • It is also assumed the %hike will remain same before and after MBA. The reason is that an MBA can't change the inherent competencies and performance level of an individual. An MBA can help get a one-time major salary hike but the future hikes will depend on the person (and an MBA program can't change a person at a fundamental level).
  •  Mrs. X expects to get a one time 50% hike
Given the above scenario what is the likely answer to the question: Does a mid-career full-time 1-year MBA have a negative financial RoI? One might think it can't be a "yes" but an insightful analysis reveals that it is actually yes. See the table below for the details of calculations.



And here's the chart showing the trend of Money W/O MBA, Money W/ MBA and Net INCOME. It clearly shows the returns over a 20 year period is always negative and in fact, keeps getting worse year on year.


So does a mid-career full-time 1-year MBA have a negative financial RoI? The answer is yes. The financial RoI of doing a mid-career full-time 1 year MBA is actually negative. Thus going by purely financial RoI perspective Mrs. X should not do an MBA.

Reasons Other than RoI for Doing or Not Doing an MBA

Though Mrs. X realizes that the financial RoI of doing a mid-career full-time 1 year MBA is actually negative there are still many other reasons she can go ahead with the MBA. Here are some reasons why MBA may have RoI in other aspects (non-financial in nature):
  • Get break into an area one always wanted to work but couldn't. An MBA degree can open certain doors that were closed before
  • Feel good about oneself by virtue of the esteem value generated in flaunting the MBA degree. An MBA degree is a great label to have on one's resume, any day
In the process of the benefits that might accrue to one certain things might get lost. Here are some of those:
  • Technical or functional competency before MBA may count for little or nothing. Also the grass always looks greener on the other side. One might get an MBA and realize that she was comfortable and enjoyed a role with more technical content as compared to a role with more managerial content
  • One would always have the disadvantage over someone who entered the corporate world with an MBA degree. An MBA degree with 10 years experience after that is not equivalent to an MBA degree with 10 years experience before that

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