© 2009 David Gustafsson

The value of education

At the moment I and Sofia are writing on our final reports in the course International Project Management. I feel done and am now bringing a topic onto this blog: How should you think when you choosing between education or working life after high school? I can honestly say that I did not do much thinking. I have assumed that education pays off in a better and more challenging job. Also education makes you grow as a person.

All though this is not necessarily true. Looking at the value of education it is a balance between costs and benefits. A particular British project management standard called PRINCE2 that I am familiar with evaluates feasibility of a project in terms of the Business Case. This implies to look at a project on the following aspects (applied to education):

  • Reason: The reason for undertaking my degree in Master of Science was to gain new knowledge, which I believe I have done and am doing. Another reason is that education is seen as a receipt on that I can perform which is valuable for employments. Also the possibility of working with more challenging tasks is an important aspect that is correlated with education.
  • Option: The alternative to education is to not educate. This includes working or doing nothing.
  • Benefit: The benefits for education include positive return on investment, new knowledge and increased possibilities for better employment.
  • Risk: The risk from education is that I haven’t learned anything, that I fail to get a good curriculum with grades or that the course does not generate the benefits I have counted on.
  • Cost and Timescale: The cost for a Swedish education equals the opportunity costs from the alternatives of working since there is no cost associated with paying for the education. The discounted cash flow calculation will show that the dime scale for return on investment on education is approximately five to ten years. The duration of the asset is probably much longer than this!
  • Investment Appraisal: In a democracy you don’t need to have approval for education.

To look at the investment of doing a master degree I will make a simple NPV calculation. I will discount outflow and inflow to the same period of time, namely the day before starting the education. The outflow consists of Opportunity costs for five years of studies. An industry worker is Sweden earns 100K SEK a year after tax which represents opportunity costs for the studies. I choose the discount rate of 10% including inflation. It is not higher since the opportunities for working are in my mind few. Discounting the outflow to NPV the day of the investment gives:

[pmath size=12] NPV = sum{i=1}{5}{100/(1+0.1)^i} K SEK= 800K SEK [/pmath]

The inflow from the education investment is calculated with the difference in earnings with and without education. For the first five years during the education income from subsidy are 25K per year after tax. Working during holidays makes another 25K extra after tax. In total for the five years of studies the NPV of inflow is 190K SEK.

This has to pay off with the extra money earned when working. A mature industry worker in Sweden can earn about 250K SEK per year which makes about 175K SEK after tax. The starting salary for a master in engineering is about 300K SEK per year (200K SEK after tax) which increases to about 700K SEK per year for a mature middle manager (400K SEK per year after tax).

Looking at the difference between an immature industry worker and a master in engineering for the first 10 years and thereafter the mature difference will give a good estimate of the NPV difference between an industry worker and a master in engineering job.

As can be seen the investment is payed back within the first ten years of working (or about year 4). The net present value of the total investment is 812K SEK measured at the time before starting the education.

+ Inflow year 1-5

190 kkr

+ Inflow year 5 to 15

380 kkr

+ Inflow year 15 to 45

620 kkr

- Outflow year 1-5

380 kkr

NPV

810 kkr

So, does education pay off? Hopefully for me it does. Of course it depends very much on the assumptions I have made and the effect of different risks. Being unlucky it could of course be a waste of time to educate. I am also a strong believer in that it is a very individual question (to educate or not). It depends and I guess the initial feeling is a very good way to determine, you never know before afterwards if it was worth it or not!