- Beginning with cost. I estimated the total cost of my loans by using a student loan calculator on the internet to see the total amount I will have paid by the time I finish paying off the debt in 20 years. I then split this amount into 20 equal yearly installments, and discounted it back to present using the risk free rate that corresponds to that year's expense (1 year rate for amount paid a year from now, 2 year rate for amount paid in two years, etc) . Using the risk free rate as the discount rate here is appropriate given this could be considered a discretionary expense. Once I discounted this amount back to present, I added the opportunity cost of being in school over the past two years, which was roughly a year and a half's salary. Adding these parameters together gave me total cost.
- Cash flow estimation. I made a lot of assumptions here. First off, the future cash flows I projected are the future differences between the salaries of what I probably would have made pre-MBA compared to what I am likely to make having completed an MBA, until age 67. To estimate these two salary amounts into the future, I started with what I was making before the program, and what I will be making once I get out. I included yearly increases of 1% each year, mostly to cover inflation (although, according to Dr. Rennie, this is a drastically undervalued estimate of future inflation, as we will all be burning dollar bills to stay warm sometime in the near future). At each five or six year interval I estimated a raise or promotion in each stream of future salaries, with a 5% increase in pre-MBA salary vs. an 8% increase in post-MBA salary. In each stream of salaries I stopped increasing the amount toward my golden years (as I start going insane). This happened at age 55 in my pre-MBA salary, and at age 60 in my post-MBA salary.
- The discount rate. This is definitely the biggest assumption I had to make. Looking on the internet for an appropriate discount rate for increases in salary due to acquiring an MBA was nearly impossible. One study used a discount rate equal to the treasury rate, which was pretty stupid in my opinion, while a handful of other studies used a variety of different rates for no apparent reason what-so-ever. So, I decided to use a multitude of rates, starting with 6%, and increasing 2% until reaching 16%. If I had to guess, I would say something around 10 or 12% seems the most appropriate. Results found below.
So, from a purely financial standpoint, it is easy to see that my investment into obtaining an MBA was a good one. As always when preforming an NPV analysis, the results are dependent on the quality of the assumptions, and although all of my assumptions aren't completely sound, I kept a fairly conservative tone throughout so I feel good about it. However, this valuation does not capture all the intangible benefits I gained throughout this entire experience. I have just spent 18 months surrounded by some of the smartest people I have ever worked with, and made some really good friends along the way. So, considering those added benefits, I would say I have drastically underestimated the value of obtaining a Walton MBA.So, after it's all said and done, would I recommend that someone go back to school and pursue an MBA? My answer, NO WAY. After all, the value of my degree decreases as more and more people earn MBAs. But, if someone was dead set on it, I would totally recommend the University of Arkansas. It is a great school that has great people associated with it.
One last thing, thanks to my wife. She deserves an honorary degree and apologies from most of my professors for what she has had to endure throughout this experience.
Good luck to everyone as they do whatever they are doing.
