How to Calculate Return on Investment for an MBA

MBA Aspirants should calculate the return on investment before choosing one program over the other. We advise against shortlisting schools purely based on ROI, but when it comes to choosing your dream school, and say if you are stuck with two equally good ones - MIT and Stanford, LBS and INSEAD, a term commonly used by Finance professionals comes into consideration – Net Present Value.

What is Net Present Value?

Net present value is the net value of cash inflows and outflows for a period, based on the current value. The definition by itself can be a little confusing, but when you calculate Return on investment for an MBA program where your expense is calculated over 1-2 years, the investment and returns have to be calculated at current value.

Let us compare MIT vs. Stanford and find out which program offers a better return on investment. The data is based on the latest comparison between MIT Sloan and Stanford MBA program. You can download the data and analysis from our new book - How to choose the Best MBA in US: The Ultimate Guide
We have added the total cost for Stanford and MIT. We would use the same numbers for the 2nd year for easier calculation.

MIT- \$100,514
Stanford- \$109,218

For the post-MBA Salary, we captured the total median base salary.

MIT - \$150,000
Stanford - \$161,000

What is the Formula for Net Present Value

Future Value = Present Value (1 + Rate of Interest) ^ n
Present Value = Future Value/((1 + Rate of Interest) ^ n)

Based on historical data from 1914 until 2017, US inflation rate is 3.28%. We will use Real Interest Rate (Interest Rate adjusted for inflation) of 2.2% for calculating the present value based on the average interest rate of 5.8% (From 1971 to 2017).

Rate of Interest = 2.2%

Below is the summary of the expense and salary for Stanford and MIT with a 10% increment added to post-MBA salary, every year.

To calculate the ROI, we need to find the pre-MBA Salary for an undergraduate with 3-5 years of experience. We have averaged the Pre-MBA Salary as \$77,000 for MIT and Stanford.

Total Opportunity Cost = Pre-MBA Salary + Pre-MBA Salary*10% Increment
= \$77,000 + \$ 84,700
= \$161,700

MIT Sloan

Total Cost = Expense + Opportunity Cost
= \$100,514*2 + \$161,700
= \$201,028 + \$161,700
= \$362,728

MIT Sloan MBA ROI: NPV Calculation

Rate of Interest = 2.2%

Present Value (Start) = -\$362,728
Present Value = Future Value/((1 + Rate of Interest) ^ n)
Present Value (Year 1) = (\$150,000)/ (1.022) ^1  = \$146,771
Present Value (Year 2) = (\$165,000)/ (1.022) ^2 = \$155,075
Present Value (Year 3) = (\$181,500)/ (1.022) ^3 = \$171,226

NPV = Present Value (Start) + Present Value (Year 1) + Present Value (Year 2) + Present Value (Year 3)
= -\$362,728 + \$146,771 + \$155,075 + \$171,226
= \$110,344 (Year 3)

Year 2

= -\$362,728 + \$146,771 + \$155,075
= - \$60,882

For MIT Sloan MBA Students, a minimum positive return of \$110,344 can be expected in 3 years’ time.

Stanford MBA

Total Cost = Expense + Opportunity Cost
= \$109,218*2 + \$161,700
= \$218,436 + \$161,700
= \$380,136

Stanford MBA ROI: NPV Calculation

Rate of Interest = 2.2%

Present Value (Start) = -\$380,136
Present Value = Future Value/((1 + Rate of Interest) ^ n)
Present Value (Year 1) = (\$161,000)/ (1.022) ^1  = \$157,534
Present Value (Year 2) = (\$177,100)/ (1.022) ^2 = \$169,636
Present Value (Year 3) = (\$194,810)/ (1.022) ^3 = \$182,577

NPV = Present Value (Start) + Present Value (Year 1) + Present Value (Year 2) + Present Value (Year 3)
= -\$380,136 + \$157,534 + \$169,636 + \$182, 577
\$129,611 (Year 3)

Year 2

= -\$380,136 + \$157,534 + \$169,636
= -\$52,966

For Stanford MBA Students, a minimum positive return of \$129,611 can be expected in 3 years’ time.

Return on Investment (Conclusion)

Stanford MBA (3 Years) = \$129,611
MIT Sloan MBA (3 Years) = \$110,344

(Stanford MBA > MIT MBA)

The above calculation is based on a simplistic model where we have used the total median base salary. The brand value of programs like MIT Sloan and Stanford MBA can give increments that are much higher than 10%. Other factors like bonuses and job sectors significantly influence the NPV.

But if you want to bet your future on ROI, choose NPV Calculation that we have demonstrated for your favorite MBA Programs.

To Learn about Top 31 MBA Programs in US - Curriculum Structure, Class Profile, Total Cost (Tuition Fee plus Living Expense) and Post-MBA Salary (Industry & Function), Download How to Choose the Best MBA in US: The Ultimate Guide

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