41 Chapter 3: Methodology 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 3.4, the 14.7% 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 17.2%, higher than what is reported in Table 3.4. The payback period is defined as the length of time it takes to entirely recoup the initial investment.41 Beyond that point, returns are what economists would call pure costless rent. As indicated in Table 3.4, Business program students at SUNY WCC see, on average, a payback period of 7.9 years, meaning 7.9 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 3.2). 41 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. Figure 3.2: Student payback period Source: Lightcast impact model Cumulative net cash flow (millions, undiscounted) Years out of school $60 $40 $30 $20 $10 $0 –$10 $80 $50 $70 2 4 6 8 12 14 16 18 20 22 24 26 28 30 10 32 34 36 38 0 40 42
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