Estimating the Internal Rate of Return on an MBA: A Comparison of the Return from Top-Ranked & Second-Tier Programs potx

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Estimating the Internal Rate of Return on an MBA:
A Comparison of the Return from Top-Ranked &
Second-Tier Programs

John B. White., Morgan P. Miles, and Roger M. White
1




ABSTRACT

An MBA is frequently touted as a ticket to financial success.
Top ranked programs often promote the starting salaries of
their graduates, with the implication that investing time and
money in their MBA program will produce a significant
return. This study estimates the internal rate of return for the
top 30 MBA programs and 15 second-tier MBA programs in
the United States by comparing cost of acquiring the degree
with the incremental post-MBA income over an expected work
life of 40 years. The rates of return range from 11 percent to
over 40 percent, with the rates of return not significantly
correlated to a program’s ranking.


Introduction

The master of business administration (MBA) is acknowledged to be a very valuable degree,
especially if it comes from a top-ranked university. It is not uncommon for the starting salary of an MBA to

be nearly twice that of an undergraduate from the same institution. This is an incredible increase in income
from a two-year degree that is not the result of significant career shift. Consequently, applicants covet
admission slots in top ranked programs, as they are viewed as tickets to the “fast track” of financial
success. Universities, likewise, seek to be included in the “top ranked” or “best” list because an unbiased,
third party endorsement is the most effective marketing. A high ranking also increases the number of
qualified applicants for the university to select from, which tends to further enhance an MBA program’s
reputation.
However, when analyzing the financial value of an MBA, the starting salary of the graduate is only
part of the equation. The value added by the degree is the function of the differential between the pre-MBA
salary and the post-MBA salary. This is somewhat analogous to the incremental cash flow analysis in
capital budgeting. The decision to buy a new machine depends not on the cash flow the new machine
produces but the additional cash flow it produces over the old machine.
Extending the capital budgeting analysis to evaluate MBA programs, the initial capital investment
would be the opportunity costs including foregone income and associated salary increases, as well as the
tuition and fees associated with the university. Tuition and fees vary greatly among the top 30 MBA
programs. The tuition and fees range from less than $9,000 per year to more than $50,000 per year.
Further complicating the issue of the value of the MBA is the price discrimination practiced by public
universities. While private universities tend to charge the same tuition for all students, residency plays a
role in the price at public universities. The tuition for a resident of the state is less than that of someone
who is classified as a non-resident. The tuition differential varies greatly across states. For example, at The
University of Virginia, a non-resident pays only 12 percent more for the degree than a resident pays.
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1
John B. White, Ph.D. Professor of Finance, United States Coast Guard Academy
, 860-941-5784, , (Contact author); Morgan P. Miles, D.B.A. Professor of Enterprise Development,
University of Tasmania, Locked Bag 1316, Launceston, Tasmania, 7250Australia; Roger M. White, University of Pittsburgh
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Georgia Institute of Technology (Georgia Tech) represents the other extreme. A non-resident pays more
than 300 percent more than a Georgia resident for the same degree.
The purpose of this study is to evaluate the MBA from a specific university as an investment that pays
dividends over a lifetime of employment. The dividend from the degree is the additional salary that results
from the degree, while the cost of the investment is the foregone income and associated tuition and fees.
The internal rate of return (IRR) on the MBA degree from the top 30 programs in the United States, as well
as 15 other programs designated as “second-tier” programs (ranked and published in BusinessWeek
magazine) will be calculated. Programs will then be ordered by their IRR, and this ranking will be
compared to the BusinessWeek ranking.
This study lies at the intersection of the literature dealing with the value of human capital
development, the determination of quality of academic programs, and the basics of capital budgeting.
Specific interest centers on the economic value of an MBA and how that value varies with the quality of the
program, as determined by some external ranking. This economic value can be translated into an internal
rate of return by comparing the costs of the degree (the initial investment) with the subsequent income
(cash-flows) over the individual’s work life (the life of the project).

Literature Review

The connection between education and income is well established. Anecdotal and empirical evidence
supports what parents and teachers always said, “You need an education to get a good job.” Francese
[2002] reported that family incomes for college graduates were nearly double the family incomes of high
school graduates. The difference is even greater for those with advanced degrees. The Wall Street Journal
[2009] examined the returns to specific graduate degrees. An MBA averaged the highest rate of return at 29
percent, followed by lawyers (25.4%) and physicians (21%). The return to the MBA was enhanced by the
shorter time required to earn the degree (2 years) than a law (3 years) or medical degree (at least 4 years).
Davies and Cline (2005), looking at data from 1993-2000, calculated the breakeven point and the internal
rate of return for the average student receiving an average AACSB-accredited MBA. The breakeven period
was estimated to be approximately nine years for the period under observation. The internal rate of return
on an average MBA was approximately 18 percent, which exceeded the average return to the Dow Jones

Industrial Average. Payback is generally regarded as a very poor technique when evaluating capital
budgeting projects, and its deficiencies make these results suspect. Comparing the 18 percent MBA return
to the Dow Jones Industrial Average is questionable since the risk level associated with the two
investments is not equivalent.
In addition, these studies looked at degrees in general and did not differentiate among the schools that
issued these degrees, but, there is no doubt that an MBA from an elite program offers more opportunities
than lower or unranked programs. Carpenter’s study [1998] evaluated the school-specific return to the top
twenty Canadian MBA programs. Her results were limited by the fact that she only considered the seven
year period from when a student began the program, and used the payback period as her metric, with
shorter paybacks implying a better return. The top twenty Canadian MBA programs differ in length,
ranging from eleven months to 24 months. Obviously, shorter programs begin paying back the initial
investment much quicker than longer programs. This bias towards a quick payback further exacerbates the
fact that payback does not incorporate nor consider cash-flows beyond the payback period.
The Wall Street Journal [2009] followed a similar approach in an evaluation of accelerated MBA
programs that are international in scope. First, accelerated programs were ranked based on the survey
results from students and alumni. The study examined a graduate’s income for the five years after the MBA
was received. The return is based on the difference between pre-MBA income and post-MBA income and
compared to the investment cost - the program’s tuition and fees. Both pre-MBA and post-MBA incomes
were assumed to increase at 4 percent annually; however, since the return from an MBA is expected to
have an effect on salaries for more than five years, this truncated analysis distorts the return on the
educational investment. Also, the assumption of a common 4 percent salary growth rate is illogical. A more
reasonable assumption would be that the income growth rate for someone who holds an MBA would be
higher than for those who do not hold that degree. Finally, excluding foregone income from the expenditure
side of the analysis ignores a significant aspect in the analysis.
Gerdes [2009] calculated an alternative measure of return, salary per tuition dollar, for the top public
and private undergraduate business programs. Using data from 2008 business school undergraduates, the
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median starting salary was divided by the annual tuition and fees required by the program. In-state tuition
rates were used for public institutions. Average starting salaries for business undergraduates were nearly
identical for the top 50 public universities and the top 50 private universities ($53,346 vs. $53,222). Public
universities provided a much higher ratio of average starting salary per tuition dollar because of their lower
tuition rates. This analysis, while developing a unique measure of return, focuses only on the initial salary
and fails to capture the return from future salary growth.
BusinessWeek [2008] provides the most comprehensive data to support its determination of the top
thirty business programs. It reports the usual academic information, such as median GMAT and the
acceptance rate of the incoming class, and certain financial information, such as the median incomes of
students by school before and after the MBA and the program’s cost (tuition and fees). A final aspect of
the rankings, the percentage of students that have a job offer at graduation, is also reported. The final
ranking depended most on a program’s selectivity (GMAT and acceptance rate) and the post-MBA salary.
The BusinessWeek ranking and its associated data are shown in Table 1. The original BuisnessWeek data
only included non-resident tuition and fees.
Gloeckler (2010) expanded the BusinessWeek published salary data for the top 30 MBA programs and
the fifteen second-tier programs by estimating median salaries shortly after graduation (less than two
years), as well as at the five-year, ten-year, fifteen-year, and twenty-year marks after the degree was earned.
These median salaries are the result of a survey of more than 23,000 MBA graduates that yielded salary
growth projections over the twenty-year period and then projected the future salaries of current graduates.
These data are also included in Table 1.
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TABLE 1


Avg Pre- Post- Est 20 Yr Tuition

2008 2006 Work MBA MBA Salary Salary & Fees
Rank Rank School GMAT Exp (in Salary Salary
20
YRS Growth ($)
months) ($000) ($000) ($000) Rate 2 YRS
1 1 Chicago (Booth) 714 58 78.0 105.0 184.0 2.845% 97165
2 4 Harvard 719 41 77.0 121.0 232.0 3.308% 101660
3 3
Northwestern
(Kellogg) 707 63 75.0 110.0 190.0 2.770% 93918
4 2
Pennsylvania
(Wharton) N/A N/A 80.0 120.0 203.0 2.663% 100860
5 5 Michigan (Ross) 701 62 63.5 105.0 141.0 1.485% 90879
6 6 Stanford 726 47 75.0 125.0 206.0 2.529% 97842
7 10 Columbia N/A 55 75.0 110.0 194.0 2.878% 94104
8 9 Duke (Fuqua) 688 67 65.0 100.0 176.0 2.867% 95000
9 7 MIT (Sloan) 711 60 70.0 116.0 177.0 2.135% 93568
10 8
UC-Berkeley
(Haas) 718 60 78.0 110.0 185.0 2.633% 84055
11 13 Cornell (Johnson) 700 54 68.0 96.5 170.0 2.872% 93000
12 11 Dartmouth (Tuck) 712 64 65.0 115.0 181.0 2.294% 91905
13 14 NYU (Stern) 717 56 65.0 95.0 172.0 3.013% 89184
14 12 UCLA (Anderson) 712 57 65.0 100.0 164.0 2.504% 77126
15 18 Indiana (Kelley) 664 59 44.0 92.0 131.0 1.783% 76440
16 15 Virginia (Darden) 701 49 63.0 100.0 181.0 3.011% 94000
17 17
North Carolina
(Kenan-Flagler) 677 63 60.0 95.0 163.0 2.736% 81401

18 NA
Southern
Methodist (Cox) 656 50 50.0 90.0 139.0 2.197% 81384
19 16
Carnegie Mellon
(Tepper) 687 55 58.0 102.0 159.0 2.244% 93844
20 26
Notre Dame
(Mendoza) 683 62 49.0 93.5 150.0 2.392% 77340

21 20
Texas-Austin
(McCombs) 681 58 65.0 95.0 161.0 2.673% 81400
22 NA
Brigham Young
(Marriott) 672 46 50.0 90.0 139.0 2.197% 37010
23 23 Emory (Goizueta) 676 61 57.0 95.0 174.0 3.072% 82856
24 19 Yale 715 60 55.0 97.0 149.0 2.169% 93098
25 21 USC (Marshall) 690 61 60.0 95.0 149.0 2.276% 88800
26 25 Maryland (Smith) 658 55 53.0 91.0 146.0 2.392% 82435
27 NA
U. of Washington
(Foster) 681 54 50.0 85.0 127.0 2.028% 64902
28 27
Washington
University (Olin) 686 47 50.0 90.0 138.0 2.160% 82672
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29 NA Georgia Tech 684 50 55.0 95.0 146.0 2.172% 64152
30 30 Vanderbilt (Owen) 653 57 57.0 91.0 155.0 2.699% 81076
2nd
Tier NA
Arizona State
(Carey) 673 54 45.0 83.0 136.0 2.500% 59208
2nd
Tier NA Babson (Olin) 625 62 55.0 95.0 151.0 2.344% 72184
2nd
Tier NA Boston U. 680 59 50.0 90.0 135.0 2.048% 73996
2nd
Tier NA
George
Washington 685 51 47.5 80.0 140.0 2.838% 65550
2nd
Tier 22
Georgetown
(McDonough) 640 62 55.0 95.0 164.0 2.768% 83868
2nd
Tier 29
Michigan State
(Broad) 605 53 40.0 93.0 132.0 1.766% 58365
2nd
Tier NA Ohio State (Fisher) 621 52 45.0 90.0 141.0 2.270% 77745
2nd
Tier 24 Purdue (Krannert) 634 44 47.0 85.0 131.0 2.186% 69880
2nd
Tier NA Thunderbird 683 50 45.0 85.0 144.0 2.671% 78255
2nd
Tier NA

UC-Irvine
(Merage) 682 54 49.0 85.0 139.0 2.490% 77897
2nd
Tier NA Connecticut 642 63 45.0 90.0 133.0 1.972% 49628
2nd
Tier NA
Illinois-Urbana
Champaign 676 50 40.0 90.0 123.0 1.574% 59504
2nd
Tier NA Iowa (Tippie) 643 40 37.0 85.0 111.0 1.343% 52309
2nd
Tier NA
Minnesota
(Carlson) 675 52 51.0 90.0 130.0 1.856% 80087
2nd
Tier 28 Rochester (Simon) 662 50 39.0 90.0 138.0 2.160% 80010

1. Tuition and all required fees for entire program. Where applicable, out-of-state costs are listed. Excludes living
expenses
2. Median salary only; does not include signing bonus, stock options, or other compensation.
Based on respondents to student survey; does not represent entire graduating class

Methodology

Estimating the value of an MBA involves a number of factors. When financial investments are
evaluated, the cash outflows are often compared to the incremental cash inflows and the internal rate of
return is derived. This type of analysis can be used to evaluate MBA programs. The average return from an
MBA from various schools, which would compare the investment of two years of tuition and fees, plus
foregone salary to the additional earning potential, would certainly be of interest to prospective MBA
students.

For an MBA, the project’s cost is represented by the foregone income from the jobs left and the
required tuition and fees. The top thirty programs are all four semester programs, where students are
admitted in the fall semester (August/September) of the first year and graduate at the conclusion of the
spring semester (usually May) of the second year. Thus, the initial investment is represented by the two
years of tuition and fees that must be paid. Since these MBA students were already working, the investment
cost also includes the value of the two years of income that is foregone by returning to school.
This study uses the BusinessWeek (2008) data on tuition and fees, as well as pre-MBA and post-MBA
salaries to determine the internal rate of return on an MBA from BusinessWeek’s top-ranked MBA
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programs. The top thirty programs were ranked, while fifteen additional second-tier programs are also
included for comparison purposes, making a total of 45 programs in the study. Ten of the top thirty
programs are at public institutions, while 9 of the second-tier programs are state supported.
While a student’s official state of record is assumed to have no effect on salary, it often has a
significant effect on cost. Public universities often have higher tuition for out-of-state students than in-state
students. This difference in cost will result in a different internal rate of return for a public university
program, depending on whether the student is classified as a state resident or non-resident. Therefore, two
internal rates of return will be estimated for the public university MBA programs evaluated. Brigham
Young University, a private institution, charges a lower tuition for students who are members of the Church
of Jesus Christ of the Latter Day Saints (LDS or Mormons) than non-church members. Therefore, two
internal rates of return for BYU will also be calculated. A total of 65 internal rates of return are estimated.
Living expenses are not considered in this study’s estimate of the internal rate of return to an MBA.
First, the relevant living expenses to include are the additional living expenses incurred. Since it is
impossible to know a student’s location prior to the MBA program, it is impossible to estimate how much
those expenses have changed. In addition, it is possible to live cheaply in high cost areas. Some may opt
for a living situation that includes several roommates, which is considerably less expensive than living
alone. Thus, the standard of living an MBA student may choose is unknown. For these reasons, living
costs are not included in the IRR estimates. A potential MBA student should realize that moving from a

low cost area to a high cost area while holding living standards constant will reduce the return to their
specific MBA investment.
The benefit from the MBA is not simply the post-MBA income. Capital budgeting looks at
incremental cash flows. Thus, the MBA’s value results from the difference in income pre-MBA and post-
MBA. If a student had an income of $75,000 when entering an MBA program and graduated with a job
offer of $75,000, then the MBA has produced no additional income. In fact, the student has been
economically disadvantages due to the loss of annual raises. An annual raise of only 4 percent implies an
income of $81,120 in two years ($81,120 = $75,000 x (1.04)
2
). If a student began an MBA program earning
$75,000 per year and expected 4 percent growth rate, then any salary less than $81,120 implies they would
have been better off without the earning an MBA.
It is assumed that once the MBA is earned, the post-MBA salary will grow. The growth rate for an
MBA from a specific program will be estimated from the data in Table 1. The difference between the
starting salary and the twenty-year salary will be used to capture the growth rate for a career. Likewise, the
assumption is made that salaries would also have increased at 2 percent had the individual had not stopped
working to earn an MBA. While the 2 percent salary growth rate may seem low, an average salary growth
rate of 2 percent for a 40-year work life is no small accomplishment. It would result in an income at
retirement of over twice the initial salary. Thus, averaging a 2 percent salary increase for forty years is not
as insignificant as it may seem.
The internal rate of return resulting from the MBA will take the tuition and fees for a particular
university plus the pre-MBA salary (which is growing at 2%) as the cash outflows in years 0 and 1. The
cash inflows will be the difference between the pre-MBA and post-MBA median salary as reported by the
institution to BusinessWeek. For instance, if the pre-MBA salary is $50,000 and the post-MBA salary is
$95,000, then the difference the first year after graduation will be $40,920 [ = $95,000 - $50,000(1 + 2%)
2
].
The incremental salary increase in the second year $42,556.80 [ = $95,000(1 + X%)
1
- $50,000(1 + 2%)

3
],
where X% is the program specific estimate of the salary growth rate. Since the MBA degree is often earned
when students are in their mid to late twenties, a 40-year work life is also assumed.
A final question is whether students with higher pre-MBA salaries make the right choice going to the
highly ranked program that offered higher post-MBA salaries? Would they have earned a higher IRR from
a lower-ranked program that is less expensive? Would a lower tuition cost coupled with a lower
incremental salary combine to yield a higher IRR? The IRR will be calculated taking student data and
matching their median pre-MBA salaries with the median post-MBA salaries at less expensive and lower
ranked programs.
RESULTS
The 20-year annual income growth rates averaged 2.4 percent. Harvard had the highest annual growth
rate at 3.3 percent, while Iowa was the lowest at 1.3 percent. Income growth estimates from the top 30
programs averaged 2.5 percent, while salaries from second-tier programs were expected to grow nearly 2.2
percent annually. These average growth rates for executives with top-tier MBAs makes the 2 percent
growth rate for non-MBAs seem quite reasonable.
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The internal rates of return on investing in a top ranked and second-tier MBA, ranging from more
than 40 percent down to 13.44 percent, are shown in Table 2. Public universities and Brigham Young
University have two IRRs since they have two-tier tuition systems. Eight of the top ten internal rates of
return are from second-tier schools, with the highest return going to Michigan residents at Michigan State
(which was a second-tier program in the BusinessWeek list). Only eleven of the top thirty returns are from
BusinessWeek’s top thirty programs. Twenty-two of the thirty highest returns are public institutions.



Table 2

IRR
2008 2006 Tuition
Rank Rank Rank School IRR
& Fees
1 2nd Tier 29 Michigan State (Broad)Res 42.78% 29,359
2 2nd Tier NA Illinois-Urbana Champaign - Res 42.33% 24,520
3 2nd Tier NA Iowa (Tippie)Res 39.69% 35,110
4 2nd Tier NA Connecticut - Res 36.85% 22,360
5 2nd Tier 29 Michigan State (Broad) 35.66% 58,365
6 2nd Tier NA Iowa (Tippie) 35.44% 52,309
7 15 18 Indiana (Kelley) Res 34.87% 40,882
8 2nd Tier NA Illinois-Urbana Champaign 33.86% 59,504
9 22 NA Brigham Young (Marriott) LDS 32.31% 18,530
10 2nd Tier NA Arizona State (Carey)Res 32.03% 23,928
11 2nd Tier NA Ohio State (Fisher)Res 31.46% 48,150
12 2nd Tier 28 Rochester (Simon) 31.23% 80,010
13 2nd Tier NA Connecticut 31.20% 49,628
14 29 NA Georgia Tech - Res 30.52% 17,816
15 2nd Tier 24 Purdue (Krannert)Res 29.25% 34,472
16 22 NA Brigham Young (Marriott) 28.96% 37,010
17 15 18 Indiana (Kelley) 28.92% 76,440
18 2nd Tier NA Ohio State (Fisher) 27.13% 77,745
19 2nd Tier NA Arizona State (Carey) 26.13% 59,208
20 20 26 Notre Dame (Mendoza) 26.04% 77,340
21 27 NA U. of Washington (Foster)Res 25.35% 43,566
22 2nd Tier NA Minnesota (Carlson)Res 25.20% 58,955
23 2nd Tier NA Thunderbird 24.80% 78,255
24 2nd Tier 24 Purdue (Krannert) 24.37% 69,880

25 29 NA Georgia Tech 24.24% 64,152
26 2nd Tier NA Boston U. 24.22% 73,996
27 2nd Tier NA UC-Irvine (Merage)Res 24.20% 59,058
28 26 25 Maryland (Smith)Res 24.12% 60,583
29 12 11 Dartmouth (Tuck) 23.88% 91,905
30 18 NA Southern Methodist (Cox) 23.49% 81,384
31 2nd Tier NA Babson (Olin) 23.45% 72,184
32 28 27 Washington University (Olin) 23.36% 82,672
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33 17 17 North Carolina (Kenan-Flagler)Res 23.17% 43,053
34 2nd Tier NA Minnesota (Carlson) 23.00% 80,087
35 27 NA U. of Washington (Foster) 22.89% 64,902
36 19 16 Carnegie Mellon (Tepper) 22.65% 93,844
37 24 19 Yale 22.42% 93,098
38 2nd Tier 22 Georgetown (McDonough) 22.40% 83,868
39 2nd Tier NA UC-Irvine (Merage) 22.27% 77,897
40 2nd Tier NA George Washington 22.12% 65,550
41 6 6 Stanford 22.08% 97,842
42 26 25 Maryland (Smith) 22.04% 82,435
43 5 5 Michigan (Ross) Res 21.93% 80,879
44 9 7 MIT (Sloan) 21.71% 93,568
45 23 23 Emory (Goizueta) 21.39% 82,856
46 5 5 Michigan (Ross) 21.19% 90,879
47 14 12 UCLA (Anderson)Res 20.32% 66,590
48 16 15 Virginia (Darden)Res 20.11% 84,000
49 30 30 Vanderbilt (Owen) 19.94% 81,076
50 17 17 North Carolina (Kenan-Flagler) 19.92% 81,401

51 2 4 Harvard 19.79% 101,660
52 21 20 Texas-Austin (McCombs)Res 19.62% 48,800
53 14 12 UCLA (Anderson) 19.58% 77,126
54 16 15 Virginia (Darden) 19.45% 94,000
55 25 21 USC (Marshall) 19.41% 88,800
56 8 9 Duke (Fuqua) 18.48% 95,000
57 4 2 Pennsylvania (Wharton) 18.36% 100,860
58 10 8 UC-Berkeley (Haas)Res 17.76% 66,475
59 3 3 Northwestern (Kellogg) 17.60% 93,918
60 7 10 Columbia 17.59% 94,104
61 21 20 Texas-Austin (McCombs) 17.48% 81,400
62 13 14 NYU (Stern) 17.05% 89,184
63 10 8 UC-Berkeley (Haas) 16.87% 84,055
64 11 13 Cornell (Johnson) 16.08% 93,000
65 1 1 Chicago (Booth) 13.44% 97,165



Res = In-state resident tuition and fees

LDS = Latter Day Saints Church member who qualifies for the lower tuition and fees


The high returns to public institutions are from two distinct aspects of their programs. First, the tuition
and fees are generally less than their private counterparts. For instance, Michigan State’s in-state tuition
and fees are $29,359 for two years, and only $58, 365 for a non-resident. Chicago and Harvard, on the
other hand, are $97,165 and $101,660 respectively for the same two-year period. The median tuition for
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BusinessWeek’s top 15 programs is $93,568, while the median tuition for the fifteen second-tier schools is
$72,184. The higher required investment reduces the rate of return for a common cash flow.
But the MBA’s from the various programs are not viewed as a homogeneous product. Indeed, the
median post-MBA income for a Chicago graduate is $105,000 per year, while the Harvard median salary is
$121,000. The median post-MBA salary from the top 15 programs is $110,000. The second-tier schools
have a median post-MBA income of $90,000, with only three of the second-tier schools reporting post-
MBA incomes of over $90,000.
Likewise, the students are not homogeneous with regard to background. The higher-ranked schools attract
students that are leaving higher paying jobs than their counterparts attending the second-tier schools.
BusinessWeek’s top fifteen schools had a median per-MBA income of $70,000, while the second-tier
median was only $45,000 before their MBA.
Since the incremental cash inflow from an investment in an MBA is the differential between the pre-
and post- MBA salary, the top ranked programs are victims of their own success. Highly ranked programs
tend to attract more experienced students from higher paying positions. The median incremental gain in
income (the difference between post MBA salary and pre-MBA salary) was $35,000 for the top ranked
programs but $40,000 for the schools in the second-tier. (For simplicity, no adjustment was made for time
value of money in the two-year differential between the pre and post MBA salary.)
When the higher income differential for the second-tier programs was combined with their lower
median tuition, it is not surprising that the second-tier schools have a consistently higher return. The
correlation coefficient between the IRR and the percentage change in income (pre-MBA vs post-MBA) is
92 percent.
Finally, these results do not imply that students who attend highly ranked programs are making irrational
financial decisions. The median income for an entering student at the University of Pennsylvania
(Wharton) was $80,000, with an expected median IRR of 18.36 percent over a 40-year career. Had this
student been attracted by the higher IRR and enrolled at the University of Michigan, he/she could have
expected a median post-MBA salary of only $93,000; however, a candidate who was accepted by Wharton
but chose to attend Michigan State would have given up an $80,000 pre-MBA salary to earn only $93,000
two years later. A Michigan State MBA would yield this candidate an IRR of only 12.45 percent if he/she
qualifies for in-state tuition, and only 11.44 percent return if he/she must pay non-resident rates. This is

considerable less than the 18.36 percent associated with an MBA from Wharton. Thus, it appears that it is
quite rational for students leaving higher paying positions to gravitate toward the programs with the higher
post-MBA salaries.

Conclusion

This study has taken the top 45 MBA programs in the United States, as ranked in 2008 by
BusinessWeek, and has evaluated the costs and cash inflows associated with earning the degree as an
investment. Tuition and fees and two years of foregone income were used as the cost of the investment.
The incremental salary was calculated and used as the investment’s cash inflows.
This study has several limitations. The salary data are from a single year, which may have been
adversely effected by the economic recession. The results may be different during an economic expansion.
However, the analytical framework for estimating the return on an MBA remains the same.
The salary data also were collected from voluntary student surveys, with less than 100 percent
participation; however, these data were considered to be of sufficient validity to warrant publication by
BusinessWeek, a highly respected publication. For a student contemplating an MBA, there is no better
salary information available. Furthermore, schools use these rankings in marketing, and prospective
students use the information as part of their decision- making processes.
The assumption in using survey data is that there is no non-response bias. The results derived from the
limited response rate are the same results that would have come from a response rate of 100%. A test for
non-response bias is to segment the responses as they are received. Early responses are then compared to
the late responses, with an assumption that late respondents are similar to non-respondents. Businessweek
does not indicate that there is any non-response bias in their data.
Salary data also do not include the value of options and bonuses that may occur in the future. These
additional sources of income can be very significant, as news reports indicate. These bonuses tend to be
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outliers, which is what makes them so newsworthy. The median salary projection is a more reasonable

expectation of what the future holds.
To the extent that a student is significantly different from the median student at a particular institution,
the internal rate of return should be adjusted accordingly. For instance, if a student enters with a salary that
is lower than the median, he/she could expect a larger salary increase, which would increase his/her IRR. If
the student is substantially older than the median, then he/she could expect a shorter post-MBA career to
enjoy the higher salary, which would lower his/her IRR.
Certain schools tend to have areas of expertise in different aspects of business. For instance, Wharton
MBAs also tend to gravitate to investment banking and financial consulting. If that is a student’s career
goal, then it is quite rational to attend a program that fits their interests, as opposed to seeking to maximize
the return on investment.
The results suggest that the “best” business school for a particular student is not necessarily the school that
is ranked most highly, nor the institution whose graduates have the highest incomes at graduation. A
prospective student’s current salary is a factor in the equation, as the pre-MBA income will be one of the
determinants of his/her incremental income. The other, the post-MBA income, is a function of the school,
the candidate, and the state of the economy (GDP growth rate, unemployment, etc.) at graduation. State
residency status is also a factor and provides a significant financial incentive to staying close to home.
Some state universities’ MBA programs offer significant returns to their residents. Students considering an
MBA would be wise to consider each of these factors.

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