The sibling rivalry between my (younger) brother and me takes a rather geeky form. I realized recently in talking to friends that we’re a very unusual case, because rather than arguing over who owes what money to whom, or who needs more money from mom and dad, we argue over who gets to pay. Maybe it’s just typical Asian upbringing at work.

A couple of months ago, we both paid a visit to our parents. I rented a car which he never used, we bought a Mother’s Day present on my credit card, and as usual, he insisted on paying for meals and everything else he could get his hands on. Not that I would have made him pay me back even without his nice gestures, but after all that, we were nothing if not even. He still insisted that I take a check back with me on my flight. I did, and kept it just long enough to shred it as soon as I got home.

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Earlier this week, the NY Times published an article entitled “Was Earning that Harvard MBA Worth It?” which summarizes some studies and the content of a yet-to-be-completed documentary that will follow a handful of Harvard MBA graduates from 1996-2026, with interviews every 5 years. I’m happy to say that most of their findings are consistent with my own recent thoughts about having an MBA degree, though I went to Michigan and not Harvard for mine.

Here are some points of interest from the article:

1. Average MBA salaries have not increased in real dollars for the last several years
2. High salaries are seen as less important for defining “success” than balance of life, respect from peers, and other intangible factors
3. Meaningfulness of job or feeling like you’re making a positive difference in the world is becoming increasingly important
4. Having an MBA from a good school can make you feel freer to take time off in your career to pursue other interests, a sort of safety net

I didn’t write much about this last point earlier, but I have to agree. I feel more comfortable having an MBA, especially as a woman who, in the future, may decide to stay at home and raise a family instead of working in corporate America, because if the day comes that I want or need to return to work, I believe having an MBA will allow me access to jobs and to return to the business workforce more easily than without one.

Sure, my work experience will be less than those of others, including many men, and I’ll have to work hard to build my career again. But being more likely to be able to be financially independent, or being able to support our family on my wages alone if I need to is also comforting. Of course, whether or not this is a false sense of security, I can’t say.

Thanks very much to my friend An for forwarding me this article!

(Note: This post is based on content from a Microsoft Excel 2003 Assistance page that does a good job of going through the step-by-step regression process in Excel, but a poor one of explaining the finance behind the example. To do this yourself, you’ll need to follow instructions to load the Analysis Tool-pak Add-In, which should already come installed with Excel.)

Imagine that you run a factory producing cool little widgets. You have the monthly data on the number of widgets you produced last year and how much it cost to produce them. How would you find out your variable and fixed costs for producing each widget? Management wants to know how much it will cost to double last year’s production numbers. What would you tell them?

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One of the most common mistakes made in when calculating DCFs and seen all too often in corporate finance analyses is forgetting to properly adjust an annual percentage rate for the period in question.

For example, if your cost of capital is 12% on an annual basis, and you’re valuing a project that lasts only a quarter, then the discount rate you use in your DCF analysis shouldn’t be 12% (the most common mistake), or even 3% (e.g. 12% / 4 quarters), but 2.87%.

Likewise, if you have a loan with an annual percentage rate of 6% and want to calculate the amount you’re paying each month, your effective rate each month isn’t 0.5% but 0.486%. Effective rates take the impact of compounding into account, whereas simply dividing one rate by the number of periods ignores this factor.

The formula for changing from an annual percentage rate to a semiannual, quarterly, or monthly one is straightforward. In general, given an annual rate:

So for monthly, quarterly, and semiannual rates, the math becomes:

Suppose I offered to give you either $1000 in June 2006 or $150 every June for the next 10 years, starting in 2007. Which offer is worth more? How would you figure this out? The answer is: by calculating discounted cash flows.

Discounted Cash Flow or DCF analysis is one of the first things taught in finance class in an MBA program. It’s a natural consequence of the time value of money, which states essentially that a dollar today is not worth the same as a dollar in the future. Discounted Cash Flow analysis is most commonly used to value a project or company (or lottery payout, as in the simple example above) using a discount rate or weighted average cost of capital, also abbreviated as WACC. (Did I forget to mention finance is big on acronyms?)

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