Economic problem
Download
1 / 12

Economic Problem - PowerPoint PPT Presentation


  • 58 Views
  • Uploaded on

Economic Problem. Evaluating Future Benefits. Income or earnings accrue in the future What are those benefits worth to us today Investing in a college or a master’s degree Situation of wrongful termination Discrimination case Value of lost future earnings. A Dollar Today or Tomorrow?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Economic Problem' - jordan-bowman


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Evaluating future benefits
Evaluating Future Benefits

  • Income or earnings accrue in the future

  • What are those benefits worth to us today

    • Investing in a college or a master’s degree

    • Situation of wrongful termination

      • Discrimination case

      • Value of lost future earnings

Prof. Leighton


A dollar today or tomorrow
A Dollar Today or Tomorrow?

  • A dollar received in the future is worth less to us than a dollar received in the present

Prof. Leighton


A dollar today or tomorrow1
A Dollar Today or Tomorrow?

  • A dollar held today can be invested at some market rate of interest so that by the next period it will be worth more than a dollar

  • $1.00(1.05) = $1.05

Today’s dollar invested at 5% grows to $1.05 tomorrow

Prof. Leighton


Investing at a rate of r
Investing at a Rate of r

  • How much money will you have in the next period if you invest B0 today at a rate of interest r ? B0 + r B0 = B0(1+r ) = B1

  • B1 next period and B0 now are equivalent values

    • Assuming you are neither present nor future oriented

Prof. Leighton


Discounted value of b 1 what is b 1 worth today
Discounted Value of B1: What Is B1 Worth Today?

  • Work the simple problem backwards B0(1 + r ) = B1

  • B1 received in the future is worth B0 today; solve for B0 B0= B1/(1 + r )

  • B0is the discounted value of B1

Prof. Leighton


Present value
Present Value

  • Value now of an entire stream of future benefits or costs

  • Receive benefits of B0, B1, B2,…,Bn over the current and next n periods

  • Face the same interest rate, r, in each period

  • The present value of benefits is given by:PVB = B0 + B1/(1 + r) + B2/(1 + r)2 + B3/(1 + r)3 +…..+ Bn/(1 + r)n

Prof. Leighton


Is a master s degree a sound financial investment
Is a Master’s Degree a Sound Financial Investment?

  • If the PVB > PVC, invest in master’s degree

  • If the PVB < = PVC, do not invest

Prof. Leighton


Planning the worksheet
Planning the Worksheet

  • Need information on

    • The direct costs of graduate school

    • The earnings foregone while in graduate school

      • The earnings stream of workers with a college education

    • The earnings stream of workers with a master’s degree

    • The appropriate rate of interest

Prof. Leighton


Ideal vs available data
Ideal vs. Available Data

  • Longitudinal data collected each year

    • Same individuals are surveyed each year

      • Some have college degree; some have master’s degree

    • Follow worker over his/her work life

    • Data sets tend to be small

  • Synthetic Cohort

    • Look at a cross-section, say 1991

    • Look at the average earnings for each age level

    • Assume hypothetical student will follow same earnings path as the different workers in the sample did at each age

Prof. Leighton


Synthetic cohort

Benefits

Indirect costs

Synthetic Cohort

Prof. Leighton


Needed formulas
Needed Formulas

  • Difference between earnings of college graduate and master’s graduate at each age

  • Discounted value of that difference at each age

  • Sum of the discounted values = PVB

  • IF function to decide whether or not to invest

Prof. Leighton


ad