59 Appendix 2: Sensitivity analysis Appendices they overstate benefits. Results presented in Chapter 3 are realistic, indicating that investment in SUNYWCC’s Business program generates 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.47 Similar to the sensitivity analysis of the alternative education variable, we vary the base case discount rates for students and taxpayers 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 Business program students’ benefit-cost ratio from 3.5 to 2.5. Conversely, reducing the discount rate for students by 50% (from 4.4% to 2.2%) increases the benefit-cost ratio from 3.5 to 5.3. The sensitivity analysis results for taxpayers show the same inverse relationship between the discount rate and the benefits. 47 These values are based on 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.” Table A2.4: Business program sensitivity analysis of discount rate % variation in assumption -50% -25% -10% Base case 10% 25% 50% Student perspective Discount rate 2.2% 3.3% 4.0% 4.4% 4.9% 5.5% 6.6% Net present value (million) $45 $35 $30 $27 $24 $21 $16 Benefit-cost ratio 5.3 4.3 3.8 3.5 3.3 3.0 2.5 Taxpayer perspective Discount rate 0.10% 0.15% 0.18% 0.20% 0.22% 0.25% 0.30% Present value benefits (million) $15.1 $15.0 $14.9 $14.8 $14.8 $14.7 $14.5
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