The effect of both higher taxes and higher minimum wages on the NPV
Assignment 1.
In this assignment, you will determine the NPV of an investment in an intangible asset. Education is the best performing asset you will ever buy (unless you decide that a low C average is good enough, then it will be the most expensive, unproductive asset you buy). It is an appreciating asset that can never be taken away from you. An education allows you to command a higher wage, decreases the amount of time you will be without a job, and generally leads to consistent wage increases every year. Not only that, research shows that better educated people are healthier, have less stress, and tend to live longer lives.
That being said, current government policies are threatening the value of that intangible asset. Namely, the increase in the minimum wage to $20/hr combined with higher tax rates on incomes over $80k/yr.
Your task is to determine the effect of both higher taxes and higher minimum wages on the NPV of your education. You will determine the NPV of education with and without the change in policies above, and calculate the costs of the policies to the individual.
Assume that you will be pursing a 4-year degree in 4 consecutive years and have a 40-year working life. You must be explicit about the assumptions you are making regarding: inflation, tax rates, opportunity costs and discount rates applied. Your analysis should also include some sort of sensitivity analysis and or scenario analysis of your assumptions. (i.e. What if the discount rate were 100bps higher/lower, what if your starting salary were 20% lower, what if wage inflation were 100bps lower, how many years of unemployment do you have as a slack resource, what is the minimum premium over minimum wages that is required just to break-even under both scenarios).
As a conclusion, advise the government on the effects of their policies. Be specific. Don’t’ just say ‘Do it or Don’t do it’. You must educate them on the full effects of their policy actions. After they are done staring at themselves in the mirror and brushing their hair, suggest other policies they could adopt concurrently that would minimize any negative outcomes.
Report Format:
Your report should follow proper business format. It should include an Executive Summary, Introduction, Issue Identification, Quantitative Analysis, Findings (i.e. discussion of the quantitative analysis), Policy Alternatives, Analysis of Alternatives, Policy Recommendation, Conclusions, Appendices & References/Bibliography. You must ensure that large calculations are provided in the appendices and the result and discussion of such calculations should be in the body of the report. Your assumptions must be clearly stated.
2016 tax rates: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html
Canadian tuition statistics: http://www.statcan.gc.ca/daily-quotidien/150909/dq150909b-eng.htm
Resources:
http://www.nytimes.com/2005/12/11/business/yourmoney/whats-the-return-on-education.html?_r=0