Using
data from Day & Newburger (2002) “The Big Payoff: Educational Attainment
and Synthetic Estimates of Work-Life Earnings,” determine the Internal Rate of Return for each of the following
scenarios. Fill in your results in the space below and then answer the
questions at the bottom. Assume that EACH year the worker earns the same
average wage as that reported in table.
(SUGGESTION: It is probably worthwhile to make several
copies of the worksheets so that you can adjust the costs and incomes under the
different scenarios without having to reload the EXCEL file).
Set
up the program in Microsoft Excel. The
formula for calculating the internal rate of return of a stream of payments is
“=IRR(D2:D55)”, where the net payment in
each period are in cells D2:D55 Two examples are shown, one for a male college
graduate paying ISU in-state fees (assumed to be $7000 for four years) and
working until age 65 (ie retires after 64) and another for a female college
graduate paying ISU in-state fees and working until age 65.
|
Scenario |
Internal
rate of return |
|
1)
In-state fees, work until 65, male |
12.05% |
|
2)
In-state fees, work until 65,
female |
11.29% |
|
3)
Nonresident fees, work until 65,
male |
|
|
4)
Nonresident fees, work until 65,
female |
|
|
5)
In-state fees, work until age 45, male |
|
|
6)
In-state fees, work until age
45, female |
|
|
7)
In-state fees, don’t work until age 35, then work until 65, male |
|
|
8)
In-state fees, don’t work until age 35, then work until 65, female |
|
Scenarios
3 and 4, repeat the exercise but assume the tuition and fees are $16,000 per
year for four years.
Compute
the internal rates of return.
Scenarios
5 and 6 repeat the exercise assuming the person only works until age 45 (ie
retires after age 44). Compute the internal rate of return.
Scenarios
7 and 8 assume the person completes college at age 21 and then does not start
working until age 35. For this scenario,
you can presume that they would not be working with a high school degree
either, so that the opportunity cost of
their time is the same in the two scenarios .
This would be equivalent to setting column E to zero for ages 22 through
34.
Answer
the following questions using your results above.
1)
How critical are college tuitions to returns to college?
2)
How do changes in length of life affect incentive to invest?
3)
Which is costlier to returns, time out of the labor force at the beginning of
the work career or time out at the end of the work career?
Extra
credit: Which would be more valuable to returns, a 10% raise at age 26 or a 10%
raise at age 56?
