Doing an MBA : An Investment Analysis

16 04 2009

 

This is that time of the yea when the B-schools send out admission offers to the selected students. The Economic Times (ET) has reported that the leading B-schools have already finalized their lists. Getting selected in a top B-school like an IIM is certainly very difficult and is prestigious too. The extent of competition is so high, that out of 2.40 lakh candidates who took the CAT exam, 0.14% or 315 students made it to IIMA. ET says that 91% of the students selected by IIMA are engineers. 

 

 

Until recently, the decision to do an MBA was a virtual no-brainer. In the last one-year, two things have changed, which makes the decision a difficult one, particularly for an engineer who has a good job. The fees have gone up and average salaries of MBAs have gone down. 

 

 

Firstly, the fees have been increased considerably. IIMA announced last year a steep hike to Rs 11.5 lakh for the PGP and followed it up with another hike of Rs 1 lakh , making it to Rs 12.5 lakh for the two-year course. IIM-B also has increased the rates by Rs1.5 lakh to Rs 11 lakh. IIM- C which had kept it rates significantly lower has also doubled the fees to Rs 9 lakh per student. The other IIMs, L, I and K have also increased the fees. ISB  which has always been the most expensive B-School in India has also increased the fees to Rs 16.5 lakh. The Tier-II schools also have increased the fees. For the purposes of this post, let us take that on average a student needs to spend to Rs 4 lakh per year on fees alone. To this add, living expenses of  Rs 1.5 lakh per annum.

An engineer with 3 years experience in a leading company, ( the preferred candidates in most B-schools), would surely be already earning Rs 4.5 lakh p.a. If the engineer leaves his job, he/she would forgo Rs 10 lakh of income. Assuming, the engineer would have got hike and bonus in the second year.

To this add the expenditure of preparing for an MBA entrance. This is not insignificant. A minimum of Rs 1 lakh. 

 

 

The total investment incurred on the 2 year MBA comes down to Rs 22 lakh, including  Rs 10 lakh in opportunity cost, due to loss of income. In the  past, the difference in salaries between an engineer and a B-school graduate was very high. With the global financial crisis the top-paying jobs have reduced considerably. The average salaries in campus placements, as reported by the IIMs, have fallen by 25-30%. IIM-A has reported that the average “domestic salary in 2009 placement was Rs 12.17 lakh p.a. The average salary reported by IIPM is Rs 4.2 lakh p.a. For the purposes of our estimates, if we take that the average salary at a Tier-II B-School for an Engineer-MBA is Rs 7.5 lakh p.a.. Please note that this is the average, indicating several MBAs who will be hired below the average. Public Sector Banks for e.g pay no more than Rs 4.5 lakhs p.a. 

 

 

Thus, the difference in the salary between an engineer and an average engineer-MBA is just Rs 2 lakh p.a. The engineer if he/she had continued in the good company would have reached Rs 5.5 lakh p.a. By spending two years at the B-school and incurring Rs 22 lakh in costs, the additional income is Rs 2 lakh p.a.

 

 

The payback period for recovering the money invested in a B-school is as high as 11 years. Even if one assumes that the rate of increase is higher for an MBA, the payback is not less than 8 years. If an MBA starts at a below average salary levels it is likely that he/she would never recover the investment made on an MBA.

 

 

 

While the case for joining the top IIMs remains strong, the case for Tier-II schools is beginning to get weak particularly for Engineer-MBAs. My advice:

 

To engineers with experience  -stick to top10 B-schools only.

 

To fresh engineers with a job offer on hand -do not go beyond top 50. B-schools only.

 

To others – use  the time spent at a B-school productively while the job market goes into hibernation and hope that by the time you pass out the economy would return to its full speed.

 

– G. Mohan

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One response

15 05 2009
Amit Jain

Mohan,

Interesting comparison — one that all MBA aspirants have to wrestle with. It might be better to use NPV instead of payback period (or at least use discounted payback period). I did some quick calculations based on your estimate of an estimated Rs. 2 lakh bump (and even escalated it at 5% throughout the career); yet, even with a 50 year career span after achieving the coveted engineer-MBA status, the NPV stays negative. I assumed a conservative discount rate of 15% for NPV (I think given India’s risk-free rate, inflation, and desired ROI, it is probably better to use even 20%). On the other hand, the salary inflation may be higher than 5% too.

Moral of the story — if your numbers are true — you are better off socking the Rs. 22 lakh in the bank and sleep peacefully and not join the rat race!!!!

Agree?

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