67 Appendix 1: Sensitivity analysis Appendices improve to $160.2 million, 20.5%, and 5.5, respectively, relative to base case results; a strong improvement, again attributable to a lower opportunity cost of time. Scenario 3: Increasing both assumptions A and B to 100% simultaneously, the net present value, internal rate of return, and benefit-cost ratio improve yet further to $179.6 million, 36.4%, and 12.1, respectively, relative to base case results. This scenario assumes that all students are fully employed and earning full salaries (equal to statistical averages) while attending classes. Scenario 4: Finally, decreasing both A and B to 0% reduces the net present value, internal rate of return, and benefit-cost ratio to $101.9 million, 9.6%, and 2.1, respectively, relative to base case results. These results are reflective of an increased opportunity cost; none of the students are employed in this case.39 It is strongly emphasized in this section that base case results are very attractive in that results are all above their threshold levels. As is clearly demonstrated here, results of the first three alternative scenarios appear much more attractive, although they overstate benefits. Results presented in Chapter 3 are realistic, indicating that investments in SUNY WCC generate excellent returns, well above the long-term average percent rates of return in stock and bond markets. Discount rate The discount rate is a rate of interest that converts future monies to their present value. In investment analysis, the discount rate accounts for two fundamental principles: 1) the time value of money, and 2) the level of risk that an investor is willing to accept. Time value of money refers to the value of money after interest or inflation has accrued over a given length of time. An investor must be willing to forego the use of money in the present to receive compensation for it in the future. The discount rate also addresses the investors’ risk preferences by serving as a proxy for the minimum rate of return that the proposed risky asset must be expected to yield before the investors will be persuaded to invest in it. Typically, this minimum rate of return is determined by the known returns of less risky assets where the investors might alternatively consider placing their money. In this study, we assume a 4.4% discount rate for students and a 0.2% discount rate for taxpayers and society.40 Similar to the sensitivity analysis of the alternative education variable, we vary the base case discount rates for students, taxpayers, and society on either side by increasing the discount rate by 10%, 25%, and 50%, and then reducing it by 10%, 25%, and 50%. Note that, because the payback period is based on the undiscounted cash flow, it is unaffected by changes in the discount rate. As demonstrated in the table, an increase in the discount rate leads to a corresponding decrease in the expected returns, and vice versa. For example, increasing the student discount rate by 50% (from 4.4% to 6.6%) reduces the students’ benefit-cost ratio from 4.1 to 2.9. Conversely, reducing the discount rate for students by 50% (from 4.4% to 2.2%) increases the benefit-cost ratio from 4.1 39 Note that reducing the percent of students employed to 0% automatically negates the percent they earn relative to full earning potential, since none of the students receive any earnings in this case. 40 These values are based on the three-year average of the baseline forecasts for the 10-year Treasury rate published by the Congressional Budget Office and the real treasury interest rates reported by the Office of Management and Budget for 30-year investments. See the Congressional Budget Office “Table 5. Federal Student Loan Programs: Projected Interest Rates: CBO’s May 2022 Baseline” and the Office of Management and Budget “Discount Rates for Cost-Effectiveness, Lease Purchase, and Related Analyses”.
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