Over the recent past, the choice of if to go back to college for a second degree has been a hard one to make. This is because of the current employment needs in the jobs market. The choice to join an MBA program should, therefore, be evaluated economically to make sure that studying for the MBA makes financial sense to the students. Studying, as well as all other undertakings that involve cash, outlays, should be appraised based on the return on investments (Rappaport, 2006). Using NPV, IRR, and Payback investment appraisal methods, this paper evaluates the research on investment in educational funding for an MBA course in human resources.
Studying MBA as an investment with returns
College fees and associated expenses turn out to be very expensive to the modern-day student. It is, therefore, imperative to ensure that one makes the right choices in terms of which MBA to pursue. In addition, it is also vital to ensure that the MAB is focused on having a specific marketable skill that can give the student a competitive edge in looking to advance in the career ladder.
A choice of whether to go for an MBA course or not should always be based on the incremental benefits that one derives from pursuing the course. This involves appraising the initial cash outlay that is committed to college tuition fees and other course-related expenses against the alternative investment projects where the funds would be effectively outlaid to earn income. If the funds were borrowed, as they are in this essay case, then the investment appraisal is based on the incremental returns derived from pursuing the MBA course against the interest charged on the higher education student’s loan.
The choice of an MBA has arrived at after considering that the market was already flooded with undergraduates who were competing for the few employment opportunities available. Therefore, an MBA, preferably in human resources, would come in handy in ensuring that after graduation, the skills acquired would provide a competitive edge against other job seekers through having acquired an extra skill in the functional area of human resources.
The opportunity cost of studying for the MBA is the interest paid on the loan borrowed to finance the course. Choosing to pursue an MBA and having gone into debt to pay for the course is a decision that was made in consideration of all the risks and returns expected from the undertaking.
Investment returns from pursuing an MBA
The most common return from an MBA is the salary that one expects to earn from pursuing the course. This should, however, be considered as the incremental salary that is earned from pursuing an MBA since there is already an assured salary from the current undergraduate study. An MBA, therefore, offers the student a chance to earn extra compensation from the specific marketable skill that is earned throughout the course.
Investment appraisal for an MBA in Human resources
This paper will concentrate on the investment in the MBA course in human resources and the expected incremental remuneration over 30 years derived from being an MBA graduate at the workplace. Human resource is a functional area of any organization. As such, an MBA in the same field would offer invaluable training on how to excel as a human resources officer and eventually a human resources manager. The paper concentrates on the assumption that there is an element of incremental cash flows arising from higher employment salaries derived from an MBA qualification.
Since the loan period is estimated to be 30 years, the employment period is matched to the same period to ensure that the incremental earnings are calculated uniformly. The earnings are consolidated into a period of five years each and it is assumed that the earnings will increase by 15% every five years until the end of the loan period. The following analysis shows the expected returns from the employment income derived from an MBA training in Human resources management.
|Initial Outlay( Amount Borrowed)||(84,000.00)|
|Expected Salary with MBA||225,000.00||258,750.00||297,562.50||342,196.88||393,526.41||452,555.37|
|Expected returns ( Salary without MBA)||175,000.00||201,250.00||231,437.50||266,153.13||306,076.09||351,987.51|
|Discounted cashflows at 10% cost of capital||(84,000.00)||31,046.07||22,168.74||15,829.80||11,303.42||8,071.31||5,763.40|
|Net present Value||10,182.74|
Analysis using NPV
The above table indicates the expected returns derived from employment income without an MBA and with an MBA. The NPV analysis focuses on the incremental cash flows since it is assumed that even without an MBA, one will be employed. The only difference is that with the MBA, the student expects to earn more income than without the MBA. From the NPV analysis, it is clear that the investment in education funding to pursue the MBA is desirable since it will produce positive net cash flows.
Analysis using the Payback method
The payback period method is a simple investment appraisal that is used to calculate the time that passes until the discounted incremental cash flows from an investment are paid off to cover the initial cash outlay (Hillman & Keim, 2001). In this case, the payback period is 7.9 years as the following table indicates:
|(84,000.00) Initial outlay – loan|
|Balance of 34000 divided by the cash flows for years 6-10=|
If the payback period was expected to be more than 7.9 years, then investment funding is desirable.
Analysis Using IRR
IRR is an investment appraisal method that is used to determine the rate of return that equates the NPV of n investment to zero. It indicates the highest allowable cost of capital that approves an investment.
The formula for calculating IRR is usually given as/
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 +… +Pn/(1+IRR)n
In this case, our IRR is 10.69%. From this analysis, the project is desirable since the IRR of 10.69 is above the preset cost of capital which is 10%.
The choice of pursuing an MBA through educational loan funding as is the case in this paper seems a desirable choice when appraised financially. However, other non-financial parameters should be considered before ultimately approving the investment.
Hillman, J., & Keim, D. (2001). Shareholder Value, Stakeholder Management, and Social Issues: What’s the Bottom Line? Strategic Management Journal, 22(2):125-139.
Rappaport, A. (2006). Ten Ways to Create Shareholder Value. Havard Business Review, 1-14.