Essay Instructions: *Your benefit-costs of pursuing an MBA at the University of Phoenix. (1 page for excel chart/4 pages summarizing results*
In this case study, the student will quantitatively analyze their opportunity costs of completing an MBA at the University of Phoenix versus not ever completing an MBA.
The first part of the assignment will be the preparation of an excel spreadsheet which shows the costs and benefits of pursuing your degrees.
The second part of the assignment will be to analyze the results that were generated from the spreadsheet.
In the first part, the spreadsheet will have seven columns.
Column 1 is the Time Period which starts with 1 (the first year of your undergraduate studies) and to up to retirement. You can assume you will be working for 40 years.
*Hampton University 1996 - Freshmen Year Undergrad
Column 2 contains your College Earnings. Did you work in your undergraduate days? If so, place these values in the spreadsheet. After you graduated, what were you earnings? Go up to the present and for the remaining time periods, estimate your earnings based on your MBA.
*Did not work in college.
*2000-$37,000
*2002-$46,000
*2003-$53,500
*2004-$60,300
*2005-$66,300
*estimates I leave to the writer.
Column 3 are the costs of your education. How much did you pay for your undergraduate studies? Graduate studies at UOPHX? Place these values here (exclude housing, transportation costs). You will notice that you will have college costs for the beginning time periods and after you graduated until retirement the values should be 0.
*Full scholarship for football all four years, undergrad.
*Graduate Studies-@$7000
Column 4 are the opportunity costs. If you chose never to pursue an MBA what would your undergraduate earnings be? Column 4 are the net benefits. Subtract column 1-column 2-column 3. Do not worry about negative values.
Column 5 is the calculation of the present value. Select a value for the discount rate (I would try 5% then do the spreadsheet again for 7%).
Column 6 is the dividing of column 4 by column 5. For each of the columns, calculate a sum. What is the value of sum at the end of column 6? Is this value greater than 0?
If so, you should pursue the MBA. If the value is less than 0 or negative, the costs of pursuing your MBA is high and you should not pursue it. If you used various discount rates, compare your results. What do you see?
Now plot the earnings of column 1 and column 3 in the same graph.
Now write a 4 page paper summarizing your results and be sure to give the assumptions in your analysis. Also analyze your graph. What do you see in your graphs? Why?
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********SAMPLE BELOW A COST BENEFIT ANALYSIS SUMMARY********
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Benefit-Cost of Pursuing Graduate Work in Economics at Southern Illinois University at Carbondale
By
Brian W. Sloboda
Southern Illinois University at Carbondale
November 5, 1992
In partial fulfillments of the course requirements for Economics of Human Resources
ECON 532-001
Dr. Shawna Grosskopf
Southern Illinois University at Carbondale
Introduction:
Why do individuals pursue an education? This analysis has generated much discussion since the appearance of Becker?s Human Capital in 1964. At the heart of the human capital model is the belief that an education is an investment of current time and money for future pay. But the significance of the human capital approach mainly relies on the individual?s rate of return to his/her training (Ashenfelter and Layard, (Chapter 6: Freeman), 1988, p.367). Basically, many individuals want to pursue advanced educational training as a means to enhance their earnings capacity. In general, to increase one?s earnings capacity can be achieved by attending high school, community college, or completing degree programs- BA, MA, or doctoral degrees; in fact, many individuals simply opt to study at trade schools or receive other technical education. Moreover, education is not the only way to achieve higher earnings: individuals can achieve higher earnings through on-the-job training. Whatever the route the individual pursues, the main objective of their decision is due to the long-term benefits it provides, i.e., higher earnings, more challenging jobs pleasant/more rewarding jobs (Ehrenberg and Smith, 1991, p. 301).
Recent studies concluded by the American Council of Education in 1977 that 80 percent of the freshmen surveyed cited the main reason for attending college was that it would enable them to get a better job. At the same time, about one-third of the sample cited the ability to make more money as a reason for going to college (Ashenfelter and Layard, (Chapter 6: Freeman), 1986, p. 373-374). The bottom line then becomes, ?Does an investment in education by individuals yield positive returns?? In general, the rate of return to education by individuals estimated for the United States falls in the range of 5-15 percent, after an adjustment for inflation. Interestingly enough, most other investments such as stocks, bonds, and real estate also fall within this range (Ehrenberg and Smith, 1991, p. 320). Then, the curious question becomes now becomes whether my pursuing graduate work in economics at SIU is worthwhile in a financial sense. In other words, what is the present value of pursuing graduate studies at SIU over entering the labor force after my undergraduate training?
Benefit-Cost Rule
An investment in education is analogous to investing in capital. How? Recall the underlying idea of an investment. An investment is a decision by an individual group to incur costs in order to receive a stream of higher benefits in the future. Like any investment, its undertaking cannot begin without some formal analysis to determine whether the investment is worthwhile or not. Thus, we utilize the Benefit-Cost Rule as an indicator whether the investment should be undertaken or not. In general, an investment or project is admissible if the sum of the discounted benefits exceeds the sum of the discounted costs. In mathematical terms, this rule can be given as follows:
(1) or
or
The above decision states that in order for an investment to be undertaken, the discounted benefits must be greater than the discounted costs. By breaking down equation (1) further, the ySIU term in the equation shows the benefits of receiving an SIU education; the CSIU term represents the direct costs of an education. The costs that generally incurred from an education are tuition/fees, textbooks and supplies. Costs such has housing, travel expenses, missing family and friends, and other items are costs incorporated into the analysis. The term after the inequality sign shows the opportunity costs incurred. In other words, these opportunity costs are yearly earnings that an individual could have earned instead of receiving his/her advanced education. Within this framework, we have r which is the real rate of interest. The value of r usually varies from one investment to another investment. In general, we can think of r as the amount of interest we could receive for another investment besides investing this money in our education. In other words, some individuals may have opted to place their money or savings in a savings account, certificate of deposit, or other financial investments if they did not pursue an advanced education.
Assumptions Concerning My Investment:
In regards for my investment, some assumptions need to be made. While an undergraduate at Rowan College of New Jersey, I developed an interest in the insurance industry since I knew several people within this field, especially actuaries. Thus, I intended to become an actuary upon graduation. However, at the same time I started to foster an interest in economics within a short-period of time after taking several introductory courses in economics. Consequently, I started to devote more attention to economics and decided to further my undergraduate economics training through graduate work. Hence, within a few years, I came to Southern Illinois University at Carbondale as a means to achieve my purpose. After completion of undergraduate work in economics, let?s suppose I decided to train further as an actuary; furthermore, I decided to take my savings and place it in a CD which in June 1990 was approximately seven percent. I will use the seven percent as my real rate of interest. ,
As for direct costs utilized in this analysis, the actual costs of my graduate economics training can be computed since I still retained the receipts from my Bursar?s bills as receipts from the University Bookstore. Moreover, the most significant cost is the foregone earnings as an actuary upon completion of my undergraduate work in economics. These foregone earnings represent my opportunity costs.
Retirement. What does this mean? There are many ways to define retirement and the appropriateness of the definition depends in part upon its use. A common definition of retirement in the minds of most people is a case whereby an individual is out of the labor force with an intention of not returning to the work-force. Other plausible definitions of retirement are given as follows:
? The individual has reduced his/her hours substantially from the lifetime average and intends to maintain hours at or below current levels
? The individual receives some of his/her income pension benefits
? The individual appears on some company?s retirement roll.
(Ashenfelter and Layard, (Chapter 5: Lazear), 1986, p. 310).
The choice of my retirement age in this analysis is the age of 62. However, I can as well as other people have the choice to continue working. As a result of this prolongment work, the yearly social security benefits increase. The implication of a prolonged working life does not always yield increased benefits in retirement. In this case, as an individual continues to work, the present value of pension benefits?summed over a life-time of the retiree?begins to decline as retirement is postponed (Ehrenberg and Smith, 1991, p. 248). From my perspective, I would rather recoup the full benefits of retirement by permanently withdrawing from the work-force by the age of 62.
Upon completion of my educational training, the level of earnings do not remain constant over time. An implication of the human capital theory concerning education is that in order for individuals to forgo earnings, pay educational expenses, and endure the educational training, higher lifetime earnings must compensate the individual. In other words, the individuals will this educational investment will lead to higher earnings (Berndt, 1991, p.154). In my case, I will complete my graduate work and find a teaching position starting at the rank of assistant professor with an average salary of $30,000. Over the course of the next six years, presumably I will engage in professional activities related to economics with salary increases of $500 per year. At the end of this six year period, I will be granted tenure as well as promotion to the rank of associate professor. Hence, my yearly salary increments will be $1,000 for the next six years. Again, during my period of being associate professor, I will still engage in professional activities related to economics. By the end of this next six year period, I will be promoted to the rank of full-professor, and my yearly salary increments $1,500 per year. From the time period of 18 to retirement at the time period of 40, I will be at the level of full professor with the same incremental pay for each year. It must be noted that these incremental pay increases throughout my professional life are simply defined in real terms meaning these incremental pay increases are not based on the cost-of-living adjustments or based on inflation. Moreover, these incremental salary increases can be visualized as merit pay increases.
On the other hand, if I pursued my interests as an actuary, the story of my lifetime earnings will be rather different. Supposedly while in my last year of undergraduate studies, I passed the first two exams in a series of ten examinations: Course 100- Calculus and Linear Algebra and Course 110- Probability and Statistics. Upon passing these two exams, I will begin work as an actuarial trainee at an insurance company. So my starting salary will be approximately $21,500 for year 1 (Gates, 1982, p. 4). For the next two years, I prepare to take Course 120 exam?Applied Statistical Methods. Upon completion of this exam, my yearly salary becomes $24,500 for time periods two and three. During this time, I begin preparation for my fourth examination?Mathematics of Compound Interest. After my preparation for this examination, I pass it. Then, my yearly salary increases to $27,500 at time period four. Also with much enthusiasm, I pass the Actuarial Mathematics within one year, so my yearly salary becomes $30,500. Over the next three time periods, I will not take any further examinations. At time period eight; however, I pass the examination in Risk Theory. Then, my salary increases to $33.500. Within a one year period, I pass the Survival Model, and my salary climbs to $36,500. Over the course of the next three years, I proceed to pass examinations in Mathematics of Demography, Construction of Actuarial Tables and Mathematics of Graduation; thus, my salaries from passing these examinations are $39,500, $42,500, and $45,500, respectively. In the end, the completion of these examinations took approximately ten years to complete. Thus, I become an Actuary New Fellow (Society of Actuaries, Fall 1992 Fellowship Catalog). Furthermore, my salary increases from $45,500 to $50,000. From this point on, my yearly salary increments will be $2,000 until my retirement in time period 40. By the time of my retirement, my earnings would have reached $102,000. As in the case of my college earnings, my actuarial earnings are based on real increases with no regards to inflation.
With regards to loans and scholarships, I have a quarter time assistantship with the Department of Economics at Southern Illinois University for the duration of my graduate studies. Thus, this will lead to lower costs of education, and during this period I do not pursue loans as a means to defray my educational costs. Because of the assistantship granted by the Department of Economics, the only direct costs that I incur during my graduate work are the fees assessed by the University, i.e., student center, athletic, health insurance etc and the purchasing of the necessary textbooks and other relevant supplies.
Analysis of Graphs
From the graphs which are located at the conclusion of this paper, we can see that if I pursued the path of an actuary, my earnings over time will increase rather significantly over time. The profile becomes steeper after time period 11due to the fact I just completed the series of examinations or I became a New Actuary Fellow. Thus, this fully coincides with the human capital theory that either educational training or some type of on-the ?job training will cause the age earnings profile to become steeper. On the other hand, we notice that in the second graph, the completion of graduate work in economics will yield a somewhat steep age-earnings profile; however, it is not as steep as the age-earnings profile as for the actuary. Thus, it can be concluded that the rate of return from my undergraduate training plus the on-the-job training yields a greater return than completing graduate work in economics. No doubt, there is a gap between the two age-earnings profiles after time period 10. However, before time period 10 the wage differential is not as significant between the two fields of study.
Intangible Benefits and Costs in Relation to My Problem
Before I proceed to discuss the outcome with regards to the Benefit-Cost Rule, I wish to discuss the intangible benefits and costs and how they may affect my problem. Recall the only costs incurred for my educational training are the costs foregone if I elected to become an actuary after graduation, and my payment of fees excluding tuition and textbooks/supplies. Thus, this analysis does not incorporate the travel costs from Carbondale to New Jersey. Also the costs of my educational training do not incorporate of missing family and friends for an extended period of time. Moreover, some of the intangible benefits also cannot be incorporated into my net benefits while at Southern Illinois University. These benefits do not describe the amount of knowledge accumulated in the understanding of economics. In other words, I will be one of the few who will have a better understanding of complex economic relationships. Moreover, it becomes generally accepted that the further away from their home they receive their education, this signals to prospective employers that I have an endurance to live in a new environment and the willingness to relocate as part of my career enhancement. In other words, I will become less marketable if I receive all of my educational training in New Jersey as opposed to receiving my graduate training in economics elsewhere. In general, prospective employers look upon with favor those who vary their studies in different locations.
Applying the Benefit-Cost Rule to this Analysis:
By looking at Table 1, the bottom of column 6, the sum of the PV of Net Benefits which is simply dividing net benefits of column 4 by the Discount Factor of column 5. As we can see the sum of this total sum equals ?198,432.55. What does this indicate? Basically, this sum indicates that my investment in graduate work in economics is not admissible. In other words, the sum of my discounted costs is greater than the sum of the discounted benefits. Furthermore, now suppose that discount rate drops to five percent. What will then happen? In general, by looking at the Benefit-Cost Rule, a decrease in the discount rate will cause the sum of the Net Benefits to increase. However, in this analysis this was not the case. Why? By looking at Table 1 and Table 2 we notice the values of Net Benefits are negative. In the general case, as the discount rate decreases this will cause the PV of Net Benefits to increase with an assumption that the net benefits are positive, not negative. Thus, by looking at Table 2, the final value at the end of column 6 is ?267,669.37. We also notice that the value moves further away from zero. Consequently, as the discount rate decreases, this no doubt will cause this value to move further away from zero; therefore, reinforcing the result that my investment is not admissible. For further analysis, I now suppose that the discount rate is ten percent. As table 3 shows the PV of Net Benefits is equal to ?140,358.42. Thus, the bottom line of this analysis is that as the discount rate is increased, the PV of Net Benefits approaches zero. Moreover, as the discount rate continues to increase, the investment will, then, become admissible once we reach the value of zero or the sum of the PV of Net Benefits becomes positive.
Also notice that if there is an increase in tuition as often proposed by the Board of Trustees, this no doubt will have no impact upon my decision since I have an assistantship as provided by the Department of Economics. Thus, any changes in direct costs of my graduate work will have little impact upon my outcome or decision to pursue graduate work in economics. In general, however, changes in tuition affected enrollment with a magnitude that roughly indicates that a $100 change in tuition would alter enrollment by .8 points. Translated into an elasticity of response, the tuition-elasticity of enrollment is about .3. Thus, this makes sense since tuition costs is a fraction of the salaries to be received by students later on (Ashenfelter and Layard (Chapter 6: Freeman), 1986, p.373).
Conclusion:
What can I conclude from this analysis? Basically, my return on graduate work in economics is unfavorable. However, we must look carefully at my opportunity costs or my earnings after completing my undergraduate work in economics. Without a doubt, I selected or wanted to get involved in a rather prestige position of being an actuary. We must also note that the field involves completion of self-study, which in terms to human capital theory represents general training. In other words, my preparation for these examinations represent information that can be applied to an insurance company. Moreover, this theory states that highly educated people should earn more than those with less human capital, yet in this case obviously we have a significant wage differential between my graduate work in economics and the opportunity costs of becoming an actuary. Also these two disciplines are highly regarded by people despite the obvious wage differential. What can we say? Basically, human capital theory does not determine the wages but is actually a theory of investment. Moreover, this theory suggests that if education is not used as consumption good, then this will induce individuals to receive additional education training they need to generate future benefits of large enough magnitude to override the investment costs. What the human capital theory asserts is that it does not completely explain the wage differentials nor does it account for reasons why we select our occupational choice (Ehrenberg and Smith, 1991, p. 346), Put in another way, many individuals may believe that the benefits of occupational choices need not be pecuniary or individuals may select an occupations nonpecuniary factors. For example, some individuals may opt to work as social workers because these individuals receive great satisfaction for their expertise to help those in need. Basically, for these individuals to achieve a high level of satisfaction, they are willing to accept a lower wage. So what is the bottom line of this analysis? Perhaps I opted to study economics for nonpecuniary factors, i.e., the challenge of studying modern economics, like to be in an economic environment etc. Whatever the results of this analysis indicate, I enjoy myself very much studying economics and being at Southern Illinois.
References:
Ashenfelter, Orely and Richard Layard: Eds. Handbook of Labor Economics, Vol 1. New York.? Elsevier Science Publishers, 1986.
Berndt, Ernst R. Econometrics: Classic and Contemporary. Reading, Massachusetts: Addison-Wesley Publishing Co. Inc., 1991.
Campbell, Mary. Lotus 1-2-3 Made Easy. Berkley, California: Osborne/McGraw Hill, 1987.
Ehrenberg, Ronald G. and Robert S. Smith, Modern Labor Economics: Theory and Public Policy. Fourth Edition. New York: Harper Collins Publishers Inc., 1991.
Gates, Anita. 90 Most Promising Careers for the 80?s. New York: Monarch Press, 1982.
Hopke, William E., Editor. The Encyclopedia of Careers and Vocational Guidance. Vol 2 8th Edition. Chicago: Ferguson Publishing Co., 1990.
Society of Actuaries. Fall 1992 Fellowship Catalog: General Information, Requirements for Admission, Course Descriptions. Schaumberg, Illinois, 1992.
