I'm currently contemplating a graduate degree (specifically an MSF) so I figured I'd do a present value calculation for two reasons: 1) It may help me make a good education decision, and 2) It's a good way to practice doing something I read about recently in a finance textbook (present value calculations).
I figure that I'll be working for about 30 years after earning my MSF, and I figure I require an annual rate of return of about 10%. With 30 periods and a 10% required rate of return, I should be willing to pay $9.4269 for an annuity of $1 a year for 30 years. The MSF would cost me $50K, so I would need to earn at least $5303.97 ($50K/9.4269) more a year for 30 years to make this a wise investment. Did I do this math correctly?
I feel there must be a more accurate way to do this, since these calculations assume I'd be paying a lump sum for my education, when in reality I'd be borrowing to pay for the MSF. How do I set up the calculations to take this into account? Do I just adjust the required rate of return, or do I need to somehow set it up so that I'm paying an annuity (student loan payments) and collecting an annuity (increased earnings)?
are you asking coz you wanna practice and get the calculation right or are you asking should you do the msf? coz the first question is largely irrelevant to the second.
I'm asking if I did the calculation correctly. I'm also asking if there are better ways to do this calculation, since it won't be a lump sum payment for the degree, instead it will be loans with interest and monthly payments. The main reason I'm doing this is because the $50K sounds like a lot to me, and I'm trying to put it in perspective and see what kind of return I would need to justify it from a purely financial perspective.
Just out of curiosity though, why exactly do you say the first question is irrelevant to the second?
coz in most cases, if you're relatively competitive (job market wise) and can get a decent job, you won't need the msf to get promoted and achieve good returns, and if you're not, the msf might be just the thing that gets you there. either way, either you need it or you don't, the returns from the degree will either be very great or mostly nonexistant. you can learn all you need about finance on the job if you're good enough. if you're not, then you can't get farther without the degree. in mathematical terms, it's a discrete rather than a continuous outcome. either it helps you or it doesn't. if it does, the benefit is greater than the investment. if not, it's a waste of time and money. the extent of loss/gain is mostly irrelevant. i'd say the answer to whether or not get an msf should be "do i need this?", "do i want to go back to school?" and "does this interest me enough?"
Yes, I realize that. I didn't study finance, which is why I think it maybe more useful to me (I studied economics at the undergraduate and graduate level).
I actually believe I could learn most of the finance stuff on the job. The problem is, those jobs will likely go to the people who already know/studied finance, so I feel like it's a catch 22: I could learn what I need on the job, but in order to get the job, I may need the degree.
I wouldn't go that extreme. I'm sure there are continuous elements at play. But even if that is the case, you are right, it can still be broken down into a discrete situation by phrasing the question this way: Does the degree increase my lifetime earnings or decrease my lifetime earnings?
Yes, I agree, those are the relevant questions to be asking. I have already asked myself those questions and below are the answers.
Q1: Do I need this?
A: I'm not sure. I've been asking that question a lot on WSO, but haven't really got anything near a consensus (if anybody reading this thread has some insights, feel free to PM me, or reply to one of my posts).
Q2: Do I want to go back to school? A: Yes, I'm definitely willing to go back to school IF it will help me career wise.
Q3: Does this interest me enough? A: Yes, I've been reading a finance textbook in my free time and I think it's pretty interesting. My educational background is in economics and math, and I like that finance builds off these topics but is much more practical and application based.
Now, with that said, I'm still curious if I correctly did the present value calculations? Or if there is another way of setting up the problem that is more accurate?
To build on dagro's point, you might see studies that state that people who get a Master's earn $XX more over the course of their life. You should assume anyone who writes these studies is borderline retarded, and undoubtedly failed introductory stats, as I've never seen one that introduced any sort of causation analysis. Your calculation of the NPV is also wrong because you've incorrectly calculated the cost of the MSF, specifically by using accounting cost rather than opportunity cost.
Yes, most people don't understand stats. As a matter of fact, it is impossible to calculate whether or not the degree caused higher earnings. When you run regressions to answer that question, you can't measure all relevant variables, so you'll never be able to address the problem that you maybe missing key unobservable characteristics between individuals. I forgot what it's called, but there is a name for this, since it's a famous problem in labor economics (as well as other areas of economics and econometrics).
Really? I thought I was able to account for the opportunity cost by playing with the required rate of return? Specifically, I chose 10% because I was under the impression that investing $50K in the stock market would yield about 7% - 9% annually, and I was trying to account for the opportunity cost of investing the money in assets rather than education/human-capital.
You're right in that respect, but the opportunity cost of the degree includes forgone earnings, so isn't 50k, it's more like 200k
Amet ad laboriosam tempora illum pariatur praesentium. Ipsam pariatur reprehenderit nulla.
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