42 Chapter 3: Investment analysis capital asset value of the students’ higher earnings stream. In effect, the aggregate FY 2021-22 student body is rewarded for its investment in SUNY WCC with a capital asset valued at $195.9 million. The students’ cost of attending the college is shown in Column 5 of Table 3.2, equal to a present value of $48.1 million. Comparing the cost with the present value of benefits yields a student benefit-cost ratio of 4.1 (equal to $195.9 million in benefits divided by $48.1 million in costs). Another way to compare the same benefits stream and associated cost is to compute the rate of return. The rate of return indicates the interest rate that a bank would have to pay a depositor to yield an equally attractive stream of future payments.32 Table 3.2 shows students of SUNY WCC earning average returns of 16.4% on their investment of time and money. This is a favorable return compared, for example, to approximately 1% on a standard bank savings account, or 9.6% on stocks and bonds (30-year average return). Note that returns reported in this study are real returns, not nominal. When a bank promises to pay a certain rate of interest on a savings account, it employs an implicitly nominal rate. Bonds operate in a similar manner. If it turns out that the inflation rate is higher than the stated rate of return, then money is lost in real terms. In contrast, a real rate of return is on top of inflation. For example, if inflation is running at 3% and a nominal percentage of 5% is paid, then the real rate of return on the investment is only 2%. In Table 3.2, the 16.4% student rate of return is a real rate. With an inflation rate of 2.5% (the average rate reported over the past 20 years as per the U.S. Department of Commerce, Consumer Price Index), the corresponding nominal rate of return is 18.9%, higher than what is reported in Table 3.2. The payback period is defined as the length of time it takes to entirely recoup the initial investment.33 Beyond that point, returns are what economists would call pure costless rent. As indicated in Table 3.2, students at SUNY WCC see, on average, a payback period of 7.3 years, meaning 7.3 years after their initial investment of foregone earnings and out-of-pocket costs, they will have received enough higher future earnings to fully recover those costs (Figure 3.1). 32 Rates of return are computed using the familiar internal rate-of-return calculation. Note that, with a bank deposit or stock market investment, the depositor puts up a principal, receives in return a stream of periodic payments, and then recovers the principal at the end. Someone who invests in education, on the other hand, receives a stream of periodic payments that include the recovery of the principal as part of the periodic payments, but there is no principal recovery at the end. These differences notwithstanding comparable cash flows for both bank and education investors yield the same internal rate of return. 33 Payback analysis is generally used by the business community to rank alternative investments when safety of investments is an issue. Its greatest drawback is it does not account for the time value of money. The payback period is calculated by dividing the cost of the investment by the net return per period. In this study, the cost of the investment includes tuition and fees plus the opportunity cost of time; it does not account for student living expenses. SUNY WCC students see an average rate of return of 16.4% for their investment of time and money.
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