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$500k is a pretty hand waved calculation. It seems like he did the math (annual salary pre-tax * years in school + tuition + living expenses) and arrived at $5

$500k is a pretty hand waved calculation. It seems like he did the math (annual salary pre-tax * years in school + tuition + living expenses) and arrived at $500k. That ignores the fact that you have living expenses whether you do the MBA or not. It ignores the fact that that the difference to your net worth between making $150k a year in pre-tax salary and $0 a year in salary is not $150k. You have to incorporate taxes.

mywittyname 11y ago
> $500k is a pretty hand waved calculation. Maybe, but there are lots of ways to calculate opportunity costs. The OP said his friend was making more than $150k/yr. So if he estimated his potential net worth in thirty years staying course versus his estimated net worth in thirty years with an MBA, then discounted it to present value, a difference of $500k is somewhat reasonable. There are plenty of other, equally valid ways for a person to calculate opportunity costs. It depends on what that person values. For example, lost wages that would have paid for vacations would not necessarily show up in a comparison of net worth, but it is certainly an opportunity cost for some people. Or having to put off starting a family, or many other milestones in a person's life.
- basseq 11y ago
  This was a couple years ago, so I don't remember the methodology, and think it was a back-of-the-envelope type of math. (Yes of course there are ways to solve "hard problems". This isn't a quantitative proof: this is an anecdote.) At the base, it was something like: - I make $150k a year and I will not make that for 2 years, so $300k. - I will make $15k as a MBA intern, so $275k. - I will have to pay $185k in school related costs[1], so $460k. I think there was a little more to it (e.g., PV/FV), but that's the basics. You're correct in noting that #3 has cost of living incorporated into it and you'd have to pay that anyway, though there's a difference between the cost of living at Stanford, e.g., and cheaper markets. Yes, you could go build a rigorous financial model. That is left as an exercise for the reader. [1] http://fortune.com/2012/12/07/stanford-mba-price-tag-hits-185k-highest-in-the-world/ http://fortune.com/2012/12/07/stanford-mba-price-tag-hits-18...
delazeur 11y ago
It doesn't look like the opportunity cost was necessarily based on pre-tax salary (although it may have been). The current pre-tax salary of ~$150k (?) was compared to the average Stanford MBA pre-tax salary of $142k, which is a fair comparison.

mywittyname 11y ago

> $500k is a pretty hand waved calculation. Maybe, but there are lots of ways to calculate opportunity costs. The OP said his friend was making more than $150k/yr. So if he estimated his potential net worth in thirty years staying course versus his estimated net worth in thirty years with an MBA, then discounted it to present value, a difference of $500k is somewhat reasonable. There are plenty of other, equally valid ways for a person to calculate opportunity costs. It depends on what that person values. For example, lost wages that would have paid for vacations would not necessarily show up in a comparison of net worth, but it is certainly an opportunity cost for some people. Or having to put off starting a family, or many other milestones in a person's life.

basseq 11y ago
This was a couple years ago, so I don't remember the methodology, and think it was a back-of-the-envelope type of math. (Yes of course there are ways to solve "hard problems". This isn't a quantitative proof: this is an anecdote.) At the base, it was something like: - I make $150k a year and I will not make that for 2 years, so $300k. - I will make $15k as a MBA intern, so $275k. - I will have to pay $185k in school related costs[1], so $460k. I think there was a little more to it (e.g., PV/FV), but that's the basics. You're correct in noting that #3 has cost of living incorporated into it and you'd have to pay that anyway, though there's a difference between the cost of living at Stanford, e.g., and cheaper markets. Yes, you could go build a rigorous financial model. That is left as an exercise for the reader. [1] http://fortune.com/2012/12/07/stanford-mba-price-tag-hits-185k-highest-in-the-world/ http://fortune.com/2012/12/07/stanford-mba-price-tag-hits-18...

delazeur 11y ago

It doesn't look like the opportunity cost was necessarily based on pre-tax salary (although it may have been). The current pre-tax salary of ~$150k (?) was compared to the average Stanford MBA pre-tax salary of $142k, which is a fair comparison.