If you don’t know what NPV stands for you will quickly learn in the first quarter of business school.  For those who cannot wait, it is the Net Present Value (“NPV”) of an investment.  That is to say, it takes all of the cash flow generated from an action (buying property, expanding your business, etc), both positive and negative, and sums them in inflation/interest adjusted current terms.

The benefit of this analysis is that it allows one to determine at the present date if a decision will make or lose them money.  For illustration purposes let’s suppose that you invest in an oil well, and it cost you $10,000.  We would put that as a -10,000 in Year 0 as it is a cash outflow.  Next let’s assume two potential scenarios from this investment.

1. You invest and then 10 years later you strike a lot of oil and sell the well for $100,000.
2. You invest and find a little oil, which is enough to pay you $10,000 for 10 years straight.

To the layman, each of these investments pays you $100,000 for a $10,000 investment, so you would be indifferent to them, however in reality or even intuitively you know that getting the money back earlier is better.  We can prove this by taking the present value (inflation/interest adjusted) of each of these payments.  So the payment in scenario 1 would be discounted 10 years and result in something much smaller.  Let’s take a look at the calculation.

So if we take the interest rate of 6% for both and lay out the cash flows each year, we can show their current values in the Present Value row.  To highlight this point, examine the series of 10,000 payments and their respective present values (“PV”).  We can see that in year 2 the PV of that 10,000 is 8,900, whereas the PV of year 3 is 8,396.  We lose the current equivalent of over $500 by delaying the $10,000 by just one year.

What’s the point of this?

Getting an MBA  is an investment in yourself, and it should be viewed through the same lens as any other investment decision.  So how would we set up this calculation?  We have to look at the two following options.

1. You go to business school, forego two years of salary, borrow around $100,000 (both tuition and cost of living) and then go on to make more money (this is the whole point) than you would on your current career  trajectory.
2. You do not go to business school and continue to make your current salary and get raises and promotions at a normal rate.  These are not easy assumptions to make but linear growth usually works best.

The best tool to calculate this, if you want to, is Excel.  If you are not comfortable with it, get comfortable now, because you will live in it for two years.  I made some assumptions here, and I think the time line should be longer, but you can see how you need to make up for two years of lost salary plus paying for school with quite an increase in future wages.  If you cannot find a job  right away, it becomes even more difficult.  The function in excel that calculates this, once you set up the cash flows and interest rates as I have them below is the ‘=NPV()’ function.  If you type it in it will ask for the following items; rate (which is the selected interest rate which I have as 6%) and values (which is all of the values from year 1 to year X for you).  Keep in mind that NPV does not account for year 0, so you need to add that separately.

This should be a helpful exercise for you if you are on the fence about going back to school, or even if you are committed and want to get started on learning Excel.

Best of luck.

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