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MBAs are a sound investment – and not just from the best known business schools
A look at Return on Investment, as reported in QS TopMBA Scorecard.
Bhavneet Singh made a careful assessment of his likely return on investment (ROI), before deciding to study at Manchester Business School. “I was already earning a high salary working at IMG, the sports management company. I looked at the MBS median salary, estimated that, with my experience I should be in the top quartile, and calculated that my ROI was sufficient to go ahead with my MBA.”
Twenty years ago, the conventional wisdom was: always ‘study at the most prestigious business school you can get in to, irrespective of cost’ - the logic being that over a twenty to thirty year working life post-MBA, course fees would be relatively insignificant, compared to the salary uplift from a prestigious business school. Subsequently, many new MBA programs have emerged around the world, which are challenging this convention. Does the tenet still hold true and can ROI shed some light?
QS TopMBA Scorecard has recently completed a study of average Returns on Investment (ROI) achieved by graduating full-time MBA students at 200 MBA programmes around the world. The results show that the typical 2 year MBA model favoured by US schools, remains competitive, but a couple of UK business schools have edged ahead. Recognising that 12 months MBA programs offer a different learning experience, we separately show the ROI table for these shorter programmes, which are dominated by European business schools.
How do you calculate the ROI and pay back period of an MBA program?
An MBA is a significant investment in one’s personal development (more important than buying a house, because it will affect your stream of income for the rest of your life). But as with any investment, it has a measurable pay back. To estimate the ‘true cost’ to complete an MBA, we take into consideration tuition costs, living, travel and book costs. In the table below, we assume annual living costs and book costs of US$23,000 per annum and apply a weighting depending on whether the location is rural, suburban or metropolitan. In addition, the opportunity cost of salary foregone, must be included in the calculation. Tuition costs for two-year MBAs like Wharton and Harvard are approximately US$35,000 (£21,250) per annum. In Europe, London Business School (LBS) and IESE offer two-year courses, whereas IMD, INSEAD, Cranfield, Warwick and other leading programmes are one year. The annual tuition cost for a full-time MBA program can be as little as £5,000 or as much as £31,500.
Salaries for graduating MBAs from top international programs have increased steadily over the last eight years (with the exception of a slight dip in 2003), and this increase has continued in 2005. Average salaries for MBAs graduating from a top US business school like Tuck, Chicago and Stanford averaged US$90,000 (£50,000) last year, compared with US$82,000 (£49,500) worldwide. Among the top 20 business schools, MBA salaries in the US in 2004 averaged US$86,000 and US$82,500 in Europe. To calculate ‘true earnings’ one could also take into account a “sign-on” bonus offered by many MBA recruiters, and the potential to earn a further US$15,000 (£8300) during a summer internship (these are not included in the results below).
Table 1 shows some assumptions a typical MBA applicant can make to calculate a 20 year ROI, as well as how long it would take him or her to pay back the MBA investment, and what would be the Net Present Value from an MBA over a 20 year period (all figures are in US$).
Table 1
| Assumptions | A) US School US$ | B) UK School US$ |
| Length of Course (Years) | 2 | 1 |
| Pre-MBA Salary | 50,000 | 50,000 |
| Post MBA Salary | 90,000 | 84,600 |
| Summer Intern/Bonus | 0 | 0 |
| Salary Growth | 0.57% | 0.57% |
| Interest rate % | 0.065 | 0.065 |
| Annual Course Costs | 36,000 | 29,700 |
| Weighting for Cost of Living | 1 | 1 |
| Annual Living Costs | -21,000 | -21,000 |
| Annual Books/ITR | -3,600 | -3,600 |
| Loan Outstanding | 72,000 | 54,000 |
| Loan Repayment Period | ||
| (Years) | 4 | 3 |
| Outcome | ||
| Pay Back Period (Years) | 3.6 | 2.5 |
| NPV (£-20 Years) | 687,500 | 564,400 |
| ROI (20 Years) | 830% | 1,074% |
The calculations reveal that for a two year MBA taken in the US, the pay back period is usually just over three and a half years. This means that three years after your MBA, you will be better off, even taking into account the salary foregone. For a one-year European MBA the typical pay back period is between two and three years.
