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

JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 67  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.  1 John B. White, Ph.D. Professor of Finance, United States Coast Guard Academy john.b.white@uscga.edu, 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  JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 68    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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 69    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. $53,222). Public universities provided a much higher ratio of average starting salary per tuition dollar because of their lower tuition rates. This analysis, while developing a unique measure of return, focuses only on the initial salary and fails to capture the return from future salary growth. BusinessWeek [2008] provides the most comprehensive data to support its determination of the top thirty business programs. It reports the usual academic information, such as median GMAT and the acceptance rate of the incoming class, and certain financial information, such as the median incomes of students by school before and after the MBA and the program’s cost (tuition and fees). A final aspect of the rankings, the percentage of students that have a job offer at graduation, is also reported. The final ranking depended most on a program’s selectivity (GMAT and acceptance rate) and the post-MBA salary. The BusinessWeek ranking and its associated data are shown in Table 1. The original BuisnessWeek data only included non-resident tuition and fees. Gloeckler (2010) expanded the BusinessWeek published salary data for the top 30 MBA programs and the fifteen second-tier programs by estimating median salaries shortly after graduation (less than two years), as well as at the five-year, ten-year, fifteen-year, and twenty-year marks after the degree was earned. These median salaries are the result of a survey of more than 23,000 MBA graduates that yielded salary growth projections over the twenty-year period and then projected the future salaries of current graduates. These data are also included in Table 1. JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 70    TABLE 1 Avg Pre- Post- Est 20 Yr Tuition 2008 2006 Work MBA MBA Salary Salary & Fees Rank Rank School GMAT Exp (in Salary Salary 20 YRS Growth ($) 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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 71    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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 72    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. JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 73    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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 74    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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 75    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 JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 76    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. References “Business School Comparator” (2008). BusinessWeek, November 13, 2008, Retrieved October1, 2009, from http://tools.businessweek.com/BSchool_Comparator/ . Carpenter, Rebecca (1998). “It’s Payback Time,” Canadian Business, 71 (17, October 30, 1998), 52-56. Davies, Antony and Thomas W. Cline (2005). “The ROI on the MBA,” BizEd, January/February, 2005, 42- 45. “Doctors’ Education Return Trails Other Professions,” The Wall Street Journal., May 5, 1994, Retrieved October 22, 2009 from http://proquest.umi.com/pqdweb?index=0&sid=1&srchmode=1&vinst=PROD&fmt=3&s Francese, Peter (2002). “The College-Cash Connection,” American Demographics, 24 (3), 42-43. Gerdes, Lindsey (2009). “Return on Investment: Public Business Schools Rock,” BusinessWeek, March 2, 2009, Retrieved October 30, 2009 from http://www.businessweek.com/bschools/content/mar2009/bs2009032_982142.htm. “Getting Your Money’s Worth? The Wall Street Journal, September 16, 2009, Retrieved October 30, 2009 from http://online.wsj.com/public/resources/documents/Accelerated-MBA-Calculator.html. Gloeckler, Geoff (2010), “MBA Pay: Top B-Schools, Top Dollar,” Bloomsburg Businessweek, May 24, 2010, Retrieved May 26, 2010, from http://www.businessweek.com/print/bschools/content/may2010/bs201005221_243715.htm. “How Far Will My Salary Go in Another City?” CNNMoney.com, Retrieved December 14, 2009, from http://cgi.money.cnn.com/tools/costofliving/costofliving.html. Middleton, Diana (2009). “The Top MBA Programs If You’re in a Hurry,” The Wall Street Journal., September 16, 2009, Retrieved October 22, 2009 from http://online.wsj.com/article/SB10001424052970204251404574344594232539808.html. . 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. JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 1 • Summer 2011 67  Estimating the Internal Rate of Return on an MBA: A Comparison of the Return from Top-Ranked & Second-Tier. 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