It is at this point last year after the IIM A interview that I started thinking about what if I converted my call? What next? At that point my answer was fairly simple take it. Who else doesn't want to? There are over 2 lakh guys vying for a seat. But once I joined the institute I began to think :). Most of us here were discussing is it worth it? The course is so rigorous that you don't get much time to enjoy many things like a nice long sleep without having to worry about quizzes, assignments, grades etc, do nothing, watch movies all day, and to simply roam around.
Then by the time I got used to the rigor it was time for summer placements. Day 0 was good but for those who did not get placed in Day 0 it was stressful. I am one of those guys. Now I seriously started thinking whether I was right in giving up a well paying job and no stress work to come here? There were lot of intangibles to consider like my job profile will be much better, An MBA will always give some Value add and people with MBA are normally given more responsibilities etc. But once you become a Management student the most important question you need to ask is Whether it makes any economic sense:)?
So I opened a spreadsheet. I used some of the concepts I learned from painful Finance and Accounting classes to see whether coming here really makes an economic sense. Some of the assumptions I have made are on an average a student joining IIM A would have earned 4lakh per annum after tax. If in case he did not come here and continued with that job by the end of another 2 years on an average he would be earning 9 lakh per annum
For serious MBA guys: The other factors I have taken into consideration are discount rate is 15% ( which is what one could have earned from investing in Mutual fund, I have neglected risk factors involved :)) Tax slabs are taken as per 2010 tax budget. The link to my spreadsheet for interested people
https://docs.google.com/leaf?id=0B5senRMGKBIgYTgzZDRiMzQtZmIwMS00YTUyLTk2MTEtNjg5OTUzYTcwZjg0&sort=name&layout=list&num=50
If I assume that I would have been earning 9lakh per annum if I stayed in my current job at the end of the year that I complete my MBA then I need to earn on an average Rs 1427870.893 to break even in 5 years. In case you are wondering what this break even is that means to equal what I would have earned by investing the money I spent on MBA plus what I would be earning as salary I would take 5 years if I get a job that pays me around 14 lakh (including tax) per annum. Not bad huh? Of course this not a perfect model people can come with different assumptions and make a better model. So I have attached the link to my spread sheet. If you change the number of years to 4 then you should be earning close to 16 lakh. You can play around with it
So it seems like it does make sense to get an MBA if average salary offered in IIM A turns out to be above 12 lakh. Based on the fee you pay and the number of years in which you want to catch up with a friend who is not doing MBA but continuing with his job you can find out what should be the Average salary package in that particular school
Here is what my excel sheet consists in brief
Discount rate 0.15
Investments -625000 -625000
Opportunity loss in leaving job -400000 -460000
Mess charges -40000 -40000
Other food charges -8100 -8100
Going to restaurants -4500 -4500
Travelling expense -20000 -20000
Misc charges -4800 -4800
Money earned from Internship 60000 0
Cash flow -1042400 -1162400
If Invested in MF -1378574 -1010782.609
Cash at the start of 3rd Year -2389356.609
Interest to be paid per annum -125000
Tax 2010 tax breaks
Number of years you wish to break even in 5
Interest tax shield -187500
Salary that you should earn after tax per annum 1210669.918
Adjusted for Tax 1427870.893
The two columns are for 2 years ...
Do post your comments
Modified the excel sheet a little bit to allow for some flexiblity. Sharing the link to it
https://docs.google.com/leaf?id=0B5senRMGKBIgOTEzNWJlZDItYjQ5Mi00NjY2LWJlMDgtNDEwMDE2NDhmOGM1&hl=en
4 comments:
Hm.. Interesting analysis on the Economic aspect of going for an MBA. I am sure but there are other positive aspects too. If you could throw some light on those, it would be easier to weigh on.
What about opportunity cost of losing those precious two years in your twenties? And the potential future gain from the marriage market? I am sure the MBA is more than paid for ;-)
Unfortunately you seem to have reduced MBA to a purely quantitative equation :)
My own thoughts about this:
http://askpsycho.blogspot.com/2006_04_16_archive.html
@Pyschodementia- I did go through your post. At the end of it all somethings can't be measure like the joy of leading a team, becoming a CEO,CFO etc. But I do like to point one thing out. Becoming a CXO depends (most of not all) which college you got your MBA from. So all these put in lot of unmeasurable things into the model. So I just evaluated the short run expectation which is monetary :)
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