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the student might think she needs five years to complete a degree, and that she might choose to
work in the U.S. Southwest, where pay rate increases have recently been better than in the
Low-risk investment rate
Investment cash flows are negative at first because of the college
investment costs, but they are followed by positive cash flows due to yearly returns. To compute
the current value, you must discount yearly cash flows back to the present using an appropriate
rate of interest. For example, say that you are promised $106 one year from now, and that you
can reliably earn 6% on your investments. The current value of the $106 to be received one year
from now is $100. In the college investment model, money is invested for four or more years,
followed by returns for a 30-year working career or more. For most people, an appropriate
lowrisk interest rate would be the rate on long-term U.S. bonds. This rate typically has been about
4%, although in recent years it has been lower.
Data about the region
Given the region the student wants to work in, the model must use the
proper rate of salary increase both for college and high school graduates.
Cost of attending college
Given the costs of the target school, the related rates of increase, and
the expected number of years needed to complete the degree, the model would compute the
yearly total cost of attendance. These values are the investment cash flows.
Cash flows in working career
Compute the yearly salaries of a college graduate and a high
school graduate under the same circumstances, and compute the yearly differences. The
differences are the investment cash inflows.
Computed net present value
Given the investment costs, investment inflows, and interest rate,
compute the present value. A positive value indicates that the investment in college was
worthwhile. A negative value indicates that the investment was not worthwhile.
In this assignment, you will produce a spreadsheet that models the problem. Then, in Assignment 2, you will
write a memorandum that explains your findings. In Assignment 3, you may be asked to prepare an oral
presentation of your analysis.
A spreadsheet has been started for you, and is available for you to use. If you want to use the spreadsheet
skeleton, go to your data files, select Case 10, and then select CollegeROI.xlsx. Your worksheet should have the
following sections:
Summary of Key Results
Cost of Attending College and Working Career Inflows
Net Present Value Calculations
A discussion of each section follows.
Inputs Section
Your spreadsheet should have the inputs shown in Figure 10-1. Note that the values shown are illustrative
only. An explanation of the line items follows the figure.
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