Analysis of the Return on Investment and Economic Impact of Education
Appendix 7: Overview of Investment Analysis Measures
The appendix provides context to the investment analysis results using the simple hypothetical example summarized in Table A7.1 below. The table shows the projected benefits and costs for a single student over time and associated investment analysis results. 40 Assumptions are as follows: • Benefits and costs are projected out 10 years into the future (Column 1). • The student attends the college for one year, and the cost of tuition is $1,500 (Column 2). • Earnings foregone while attending the college for one year (opportunity cost) come to $20,000 (Column 3). • Together, tuition and earnings foregone cost sum to
$21,500. This represents the out-of-pocket investment made by the student (Column 4). • In return, the student earns $5,000 more per year than he otherwise would have earned without the education (Column 5). • The net cash flow (NCF) in Column 6 shows higher earnings (Column 5) less the total cost (Column 4). • The assumed going rate of interest is 4%, the rate of return from alternative investment schemes for the use of the $21,500. Results are expressed in standard investment analysis terms, which are as follows: the net present value, the internal rate of return, the benefit-cost ratio, and the payback period. Each of these is briefly explained below in the context of the cash flow numbers presented in Table A7.1.
40 Note that this is a hypothetical example. The numbers used are not based on data collected from an existing college.
TABLE A7.1: Example of the benefits and costs of education for a single student
1
2
3
4
5
6
YEAR
TUITION
OPPORTUNITY COST
TOTAL COST
HIGHER EARNINGS
NET CASH FLOW
1
$1,500
$20,000
$21,500
$0
-$21,500
2
$0
$0
$0
$5,000
$5,000
3
$0
$0
$0
$5,000
$5,000
4
$0
$0
$0
$5,000
$5,000
5
$0
$0
$0
$5,000
$5,000
6
$0
$0
$0
$5,000
$5,000
7
$0
$0
$0
$5,000
$5,000
8
$0
$0
$0
$5,000
$5,000
9
$0
$0
$0
$5,000
$5,000
10
$0
$0
$0
$5,000
$5,000
Net present value
$21,500
$35,753
$14,253
Internal rate of return
18%
Benefit-cost ratio
1.7
Payback period
4.2 years
5 8
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