Analysis of the Return on Investment and Economic Impact of Education

Appendix 2: Frequently Asked Questions (FAQs)

This appendix provides answers to some frequently asked questions about the results.

What is economic impact analysis? Economic impact analysis quantifies the impact from a given economic event – in this case, the presence of a college – on the economy of a specified region. What is investment analysis? Investment analysis is a standard method for determining whether or not an existing or proposed investment is economically viable. This methodology is appropriate in situations where a stakeholder puts up a certain amount of money with the expectation of receiving benefits in return, where the benefits that the stakeholder receives are distributed over time, and where a discount rate must be applied in order to account for the time value of money. Do the results differ by region, and if so, why? Yes. Regional economic data are drawn from Emsi’s proprietary MR-SAM model, the Census Bureau, and other sources to reflect the specific earnings levels, jobs numbers, unemployment rates, population demographics, and other key characteristics of the region served by the college. Therefore, model results for the college are specific to the given region. Are the funds transferred to the college increasing in value, or simply being re-directed? Emsi’s approach is not a simple “rearranging of the furniture” where the impact of operations spending is essentially a restatement of the level of funding received by the college. Rather, it is an impact assessment of the additional income created in the region as a result of the college spending on payroll and other non-

pay expenditures, net of any impacts that would have occurred anyway if the college did not exist.

How does my college’s rates of return compare to that of other institutions? In general, Emsi discourages comparisons between institutions since many factors, such as regional economic conditions, institutional differences, and student demographics are outside of the college’s control. It is best to compare the rate of return to the discount rates of 4.5% (for students) and 1.1% (for society and taxpayers), which can also be seen as the opportunity cost of the investment (since these stakeholder groups could be spending their time and money in other investment schemes besides education). If the rate of return is higher than the discount rate, the stakeholder groups can expect to receive a positive return on their educational investment. Emsi recognizes that some institutions may want to make comparisons. As a word of caution, if comparing to an institution that had a study commissioned by a firm other than Emsi, then differences in methodology will create an “apples to oranges” comparison and will therefore be difficult. The study results should be seen as unique to each institution. Net Present Value (NPV): How do I communicate this in laymen’s terms? Which would you rather have: a dollar right now or a dollar 30 years from now? That most people will choose a dollar now is the crux of net present value. The preference for a dollar today means today’s dollar is therefore worth more than it would be in the future (in most people’s opinion). Because the dollar today is worth

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