Issue link: http://www.e-digitaleditions.com/i/59881
Getting a plain-vanilla MBA today is like receiving a tax-free, cash award of more than a half million dollars. Net Present Value: To determine net present value for an Breakeven on Investment in an MBA 10 Years from start of MBA studies 9 8 7 1993 1994 1995 1996 1997 1998 1999 2000 2001 Internal Rate of Return: In 1993, the average full-time MBA student could expect that, over the course of his career, his $124,000 investment in an MBA would yield total increased compensation of $745,000 (in 1993 dollars). That's the equivalent of a real rate of return of 15 percent—i.e., 15 per- cent more than inflation. By 2001, however, the average stu- dent investing $162,000 in an MBA could expect total increased earnings of $1.4 million (in 2001 dollars) over the course of a career. That works out to a 17.6 percent real rate of return, or 2.6 percent more than in 1993. And this was despite a 50 percent increase in tuition. In short, over the past decade, an MBA's average ROI has been three times the return on Treasury Bills, ten percent bet- ter than triple-A bonds, and four percent greater than the Dow Jones Industrial Average (DJIA). From 1993 through 2001, as Figure 3 shows, only the NASDAQ provided a return on investment equal to that of the plain-vanilla MBA. Average Rates of Return (1993 through 2001) 14% 16% 18% 20% 10% 12% 0% 2% 4% 6% 8% 6 Month CDs 20-Year T-Bills AAA Bonds BAA Bonds S&P 500 DJIA NASDAQ MBA $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 Clearly, not all MBAs attain greater compensation and career benefits than their counterparts with bachelor's degrees. Still, it's even clearer that the "average" MBA fares spectacularly better than the "average" college graduate. Getting a plain-vanilla MBA today is like receiving a tax-free, cash award of more than a half million dollars. No wonder 100,000 students are currently seeking mas- ter's degrees in business. Perhaps, unlike the critics, these can- didates have done the math to determine what very real rewards they can reap by investing in their MBAs. ■ z Antony Davies is a Research Fellow at the Mercatus Center, George Mason University, Capitol Hill Campus, and assistant professor of eco- nomics at Duquesne University in Pittsburgh, Pennsylvania. Thomas W. Cline is an associate professor at Saint Vincent College in Latrobe, Pennsylvania. This article is adapted from a lecture given to policymakers at the U.S. House of Representatives in March. BizEd JANUARY/FEBRUARY 2005 45 MBA, look at how much it will cost a candidate in tuition and lost compensation, and subtract that figure from what the degree holder expects in increased salary over time. In 1993, a 28-year-old could determine that the probable cash-in-hand value of her MBA was $360,000. Put another way, suppose two identical 28-year-old college graduates were contemplat- ing their futures in 1993. One of them was given $360,000 and entered the job market; the other started with nothing and had to pay for her own MBA. By the end of their careers, the two would be equally well-off financially. Figure 4 shows that, by 2001, the cash-in-hand value of an MBA had increased significantly, to $550,000. Net Present Value of an MBA (2003$)