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Return on Investment in Education

In life, people need to make a number of investments to secure their future. In some cases, they have to forego immediate gratification of needs and ‘wants’ to pay the price for a better future. For example, one may forego marriage to focus on investments meant to establish them financially. One may also forego a job to further their education. It is what I did to pursue my MBA. I made the decision to stop working to enroll for an MBA for a period of years.

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In this paper, I am going to analyze the projected return on the investment I made for my college education. I will also analyze the projected future employment after graduating. To this end, I will calculate the expenses and opportunity costs related to my decision to pursue an MBA. I will also assess my desired occupation to determine the compensation or return expected to offset the costs incurred.

The decision to Pursue an MBA

My decision to pursue an MBA was to gain skills and information on business concepts that I would apply to my benefit in my lifetime career. As such, I will be in a position to make better financial and personal decisions. The knowledge acquired during my study would not only be important to my employer, but also significant in helping me make informed investment decisions. My decision was also inspired by the fact that I would get better compensation at my place of work (Byrd, Hickman & McPherson, 2013). If all goes well, I feel that I am likely to get a job promotion that will see me earn an extra $5000 annually.

I also determined the feasibility of my decision to pursue an MBA. As such, I had to calculate the expenses and opportunity costs associated with my decision to further my education. The expense incurred is about $60,000. I used a loan to service my education. In this case, the opportunity costs associated with the decision to pursue an MBA include foregoing a career. To gain a better understanding of the expenses and opportunity costs associated with the undertaking, I used one formula. The formula is the Net Present Value [NPV] (Moretto, 2008).

In finance, NPV is also commonly referred to as Net Present Worth (NPW). It is defined as the sum of the incoming and the outgoing flow of cash for a specified duration of time. The formula is as follows:

Formula

In this case, there are no cash inflows. As such, the NPV value for the investment will be:

  • NPV=$0-$60000
  • NPV=-$60000

I will not be able to work for 2 years to focus on my education. As such, I will be required to forego my income for the entire duration (Du, 2012). The income before pursuing an MBA will be the opportunity cost. With an annual salary of $112000, the opportunity cost will be $112000*2= $224000.

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Analysis of Desired Occupation

To determine the return on investment, I needed to establish an Internal Rate of Return (IRR). The IRR value is the rate of return for an investment at which the project’s NPV is equal to zero (Du, 2012). At this point, the cash inflows are equal to the outflows. In this case, it is assumed that the $60,000 investment was made in two equal installments for the duration of the two years. Consequently, the annual income is expected to increase by $5000 following the successful completion of the MBA. The starting salary as a Healthcare Administrator will be $200000. The extra income will be expected from a Home Healthcare Business. The cash flow will be as follows:

Year Cash Flow

  • 60000
  • 200000
  • 205000
  • 210000

NPV=-60000+200000/(1+r)1 + 205000/(1+r)2 + 210000/(1+r)3=0

200000/(1+r)1 + 205000/(1+r)2 + 210000/(1+r)3 =60000

1RR=5.09%

To assess the viability of the investment, it was important for me to determine the duration within which I would be able to calculate payback. The payback period is a common term in capital budgeting (Byrd et al., 2013). It is defined as the period needed for one to recoup the funds that they expended in an investment (Byrd et al., 2013). It is calculated using the formula below:

Formula

In this case, the initial investment is $60,000.

The periodic cash flow is $5,000.

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Payback period= 60,000/5,000= 12.

As such, I will require work for 12 years to recoup the funds I have used to pay for my MBA. It is the period within which I will start enjoying the benefits of my decision.

Conclusion

I had decided forego my current earnings as an employee to pursue my MBA. In this paper, I determined that I need to work for 12 years to offset the expenses incurred as a result of the decision to invest in education. To achieve this, I am projecting that the starting salary for Healthcare Administrator, the post I am targeting, will be 20,000 dollars per annum. Consequently, I can conclude that the investment is worth the costs.

References

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial finance. London, UK: Bridgepoint.

Du, D. (2012). Momentum and behavioral finance. Managerial Finance, 12(1), 364-379.

Moretto, E. (2008). Managerial finance. Bradford, England: Emerald.

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