benefit-Costs of pursuing an MBA
Even though each of us has his/her own perspective of happiness and sense of life, we all agree that the integral part of these are the financial stability complemented by personal professional success. That is why we all strive very hard to achieve ambitious financial and professional goals and choose our own paths to them. But through historical and empirical evidence it has become clear that on average, the better education one has, the better are one's chances of fulfilling the boldest dreams.
We, Americans, spend millions of dollars on our education, which we consider as investment in our human capital. According to the public opinion research conducted by the Educational Testing Service: "Nearly all (96%) adults believe that a college education is a good investment, including 72% who say it is a very good investment."
I have Bachelor of Sciences degree from Hampton University and my goal is to consider whether pursuing MBA with Phoenix University would be a good investment for me and how much present value it will add comparing with not ever completing this degree. The projected future earnings if having completed this education or not are presented at the graph below.
Picture 1. Projected earnings after receiving MBA vs. foregone Opportunity Costs.
The detailed calculations for this investment opportunity are recapitulated in Table 1.
Table 1. Analysis of possible earnings with MBA and without MBA.
Year
Earnings
Cost of Education
Opportunity Costs
Net Benefits
PV of PV
the first column of Table 1 I depicted time period for this project. I started my calculations with year 1996 when I was Freshman at Hampton University. I will assume that I will work 40 years after my undergraduate studies, and this will be the length of the project.
As I consider purchasing MBA as an investment opportunity, I will evaluate...
One should go ahead with investment project, if this project has positive Net Present Value, "The Net Present Value rule states that managers increase wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with positive net present value" (Fundamentals of Corporate Finance, Brealey & Myers, 3rd ed., p. 344). Thus, in column two I have presented all my earnings if I pursue my MBA, thus they are the cash flows of the project.
In column three I depicted my spendings on education. As I got full football scholarship while studying in undergraduate university, the educations costs will include only estimated costs connected with my pursuing MBA.
'A project's present value depends on the extra cash flows that it produces. Forecast first the firm's cash flows if you go ahead with the project. Then forecast the cash flows if you don't accept the project. Take the difference and you have the extra (or incremental) cash flows produced by the project" (Fundamentals of Corporate Finance, p. 381). According to this rule, I included in my education costs only incremental costs, thus, costs that would otherwise not occur if I was not pursuing my MBA degree. My living expenses, transportation, phone calls, other personal expenditures would be present any way, would I be working or studying. Thus, I did not take them into consideration in education costs.
'Opportunity cost of capital is the expected rate of return given up by investing in a project"(Fundamentals of Corporate Finance, Brealey & Myers, 3rd ed., p. 344). Applicable to our investment project, opportunity cost is the opportunity foregone, or benefits that could be received from the opportunity of not getting MBA and getting appropriate earnings. As I was working four years after I received my undergraduate education, I will include these earnings both into earnings with MBA or without MBA as these earnings are not incremental and will…
