Defarian Early Childhood Intervention Program

A Social Cost/Benefit Analysis to advise the Kingsland Government

Prepared by Florian Weltewitz,

B. Economics student, School of Economics, University of Queensland, 2006 1

1
This report and the accompanying Excel spreadsheets were prepared by Florian Weltewitz in part
fulfilment of the requirements for an undergraduate course in benefit-cost analysis at the School of
Economics, University of Queensland in 2006, and are reproduced here with his permission.
 DECIP Case Study Report

Table of Contents

Executive Summary..............................................................................................3

1. Introduction.....................................................................................................4

2. Methodology.......................................................................................................4
2.1 Social Benefit Cost Analysis..............................................................4
2.2 Decision Criteria..................................................................................5
2.3 Variables...............................................................................................5
2.4 Assumptions.........................................................................................5

3. Results.................................................................................................................7
3.1 Project Analysis....................................................................................7
3.2 Private Analysis....................................................................................8
3.3 Efficiency Analysis...............................................................................8
3.4 Referent Group Analysis.....................................................................8
3.5 Federal Government............................................................................9
3.6 Alternative Discount Rates..................................................................9

4. Sensitivity Analysis............................................................................................10
4.1 Best Case Scenario...........................................................................10
4.2 Worst Case Scenario........................................................................10
4.3 Participants...........................................................................................11
4.4 Other Community.................................................................................12
4.5 Education Department.........................................................................12

5. Risk Analysis........................................................................................................13

6. Conclusions and Recommendations................................................................14

7. Appendices

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 DECIP Case Study Report

Executive Summary

The Kingsland Education Departments trial run of the new Defarian Early Childhood Intervention
Program, or DECIP, has yielded much valuable data for policymakers to use in making a decision
on whether or not DECIP should become an ongoing initiative by the department.
The program has the goal of enabling children from low-income at risk families a better start in
life through the comprehensive provision of early childhood education, day care and health care.
This report aims to use this trial data and model the viability of DECIP as accurately as possible
through weighing up the programs benefits and costs to the people of Kingsland. It uses the
Social Cost/Benefit Analysis methodology for this purpose, converting the effects of the
program into positive and negative cash flows while accounting for market imperfections at the
same time.
Notwithstanding a number of assumptions made during the analysis, overall it is found that
DECIPs trial has been a success. The initial investment by the education department was very
much worth it as the participants began to enjoy much greater incomes, providing a net gain to
Kingslands community of more than $80,000 per child.
The report then goes on to test the robustness of these results by changing variables found to be
of importance and observing the resulting effects. Overall the two most important variables were
found to be the additional relative income DECIP participants can expect compared to non-
participants, as well as the salaries that DECIP staff can expect to earn. However, even though
both of these variables are important to the success of DECIP, it was found that the risk of the
project actually becoming a financial loss to Kingsland is extremely small.
A formal risk analysis confirms this, as it is found that for the identified variables 90% of possible
outcomes sit comfortably in the black.
Overall the report concludes that while there may be variations in the magnitude of DECIPs
positive effects, the program is extremely unlikely to become a financial loss to the state. The
recommendation is therefore to proceed and make DECIP an ongoing part of the education
departments strategy.

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 DECIP Case Study Report

1. Introduction

This report is an investigation into the merits of the Kingsland state governments proposed
Defarian Early Childhood Intervention Program, or DECIP. Recognising the importance of early
childhood education as an influence on future educational performance and its positive effects on
many aspects of the childs life, the government began a trial run of the project in 1985. Using the
findings from this trial, this report aims to answer questions about its success and support a
decision about whether the program should be taken up for all eligible children in Kingsland.

The DECIP revolves around providing intensive pre-school services to children from low-income
families in the form of designated day care centres until the age of five, when regular education
programs begin. These day care centres operate for the entire day, leaving families free to
continue their normal activities. The focus of the early childhood education is on language
development, as this area has in the past been identified as a source of distress with many
children from low-income families.

2. Methodology

2.1 Social Benefit Cost Analysis

A Social Benefit-Cost Analysis, such as the one undertaken here, aims to quantify the benefits
and costs associated with a certain course of action, present them in a logical way and deliver
clear numerical results to represent the benefits to various groups in society. Of particular interest
for such an analysis are of course the parts of society on behalf of which a decision must be
made, the Referent Group.
To gain a picture of the project as a whole, four different analyses must be undertaken. The first,
henceforth called the Project Analysis simply values the projects costs and benefits to society
as a whole at market prices.
After this, the next step is to look at the project from the view of the private parties (i.e., do a
Private Analysis), mainly to understand the gains individual private parties can expect from it
and thus allow the investigator to predict the behaviour of these parties. In the case of the
DECIP, the two private parties of interest are the Kingsland Education Department, as well as the
families involved in the project.
While at this stage market prices are used, the Efficiency Analysis expands the benefits and
costs by accounting for market failures, attempting to accurately measure opportunity costs to
agents and factor them into the analysis and otherwise present a view of the project for society
as a whole.
Once these three different analyses have been completed, the researcher identifies the referent
group and investigates the project from the view of these parties. It is the referent group that is of
interest in making a decision, and thus only this part of the BC Analysis is the ultimately decisive
one. For the project in question the referent group has been defined as the society of Kingsland,

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 DECIP Case Study Report

which includes the Education Department, the families which take part in the project and other
Kingslanders who stand to gain or lose from DECIP, such as volunteers and teachers.
It should be noted that in this report incremental costs and benefits are used, meaning that
DECIP is compared to continuing the normal education system, rather than being compared to
no education at all. Occasionally BC Analyses will overlook the best possible alternative, and
thus overstate the benefits of a project, and therefore great care has been taken in this case to
avoid this mistake.

2.2 Decision Criteria

Once the benefits and costs to the parties in question have been calculated and presented, the
decision maker can use a number of different measurement concepts to aid in coming to a
conclusion. Without a doubt the two most important such concepts are the Net Present Value (or
NPV) of a series of cash flows, and the Internal Rate of Return (or IRR) of such a series.
The NPV is a measurement that uses the discounted present value of all the cash flows of a
series to arrive at a number which can be interpreted as being the amount a person would have
to receive today to give up these future cash flows. A positive NPV would therefore indicate that
the sum of the cash in- and outflows would leave a person better off, while a negative NPV would
indicate that the person would lose out from the project. As a general rule, the higher the NPV of
a project, the better it is and the more likely the decision maker should be to choose it.
IRR on the other hand is defined as the discounting interest rate that would be required to return
a NPV of zero. In practice, this means that the higher the IRR, the more likely the project is to
have a positive NPV and therefore be profitable. However, IRR cannot be used to choose
between several projects with a positive NPV as it doesnt offer information on how profitable
they would be, and should therefore never be used as a sole decision criterion.

2.3 Variables
Of course the costs and benefits of a project like DECIP are by necessity forecasted and not
known in advance. Faced with this uncertainty, this report identifies a set of key variables, the
values of which have been predicted using the findings of the trial program that began in 1985, as
well as other relevant information. It should be made very clear that the outcomes presented in
this report depend on the assumed values of the variables. These assumptions may well be
incorrect or inaccurate, which can potentially severely impact on the project outcomes. In the
sensitivity- and risk analyses it will be attempted to account for some of these impacts, but
nonetheless the decision maker should be aware that projections for more than 70 years into the
future are little more than educated guesses.

2.4 Assumptions
This section of the report will list some of the more important assumptions made during this
investigation. While most of these assumptions should be quite reasonable, it is nonetheless
necessary that they be listed explicitly at this stage.

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 DECIP Case Study Report

Investment Expenditures and Financing

As far as expenditures are concerned, the data from the program trial have been used. This
means that the per child investment costs will run for the five years of the program, with the
second and third years being the most cost-intensive. Of the education departments
expenditures, staff salaries are the largest item. Equipment and renting premises are however a
relatively small fraction of the cost, since premises are already available and much equipment
can simply be diverted from an alternative use.
To help finance this investment, the Kingsland Education Department will take up a loan from the
Federal Government worth $200,000 at an interest rate of 2% to be repaid in five years.

Alternatives to DECIP
It is assumed that children who do not enter DECIP are instead attended to by a combination of
the parents and privately hired carers.

Positive Effects of DECIP to the Community

It is also well-understood that a better education tends to reduce the likelihood of an individual
engaging in criminal activities, particularly of becoming a career criminal. Since the costs of such
a life of crime both to the government and to the victims are significant, the reduced crime forms
a valuable benefit of the project. In this report these savings are represented by two perpetuities,
one for the immediate likelihood of committing a crime and the other for the risk of the participant
going on to be a career criminal.
Furthermore, a correlation has been shown to exist between quality education and the likelihood
of an individual taking up smoking. Since smokers develop health problems, this represents a
significant saving for the health system.
Importantly, this report does not include indirect positive effects of the participants successes.
While crime and health costs are accounted for, the potential effects of the program on income
inequality and economic growth as a whole (be it through more consumption or a more
entrepreneurial spirit on their part) have not been measured. These would be extremely difficult
to quantify, but they could increase the NPV of DECIP further. For the time being it must be noted
that this report will therefore tend to underestimate the benefits of the project somewhat.

Positive Effects of DECIP to the Participants and their families

It can be observed that children from high income households are more likely to eventually earn
high incomes themselves. This positive effect on future generations of DECIP participants
families has been included in the report. However, for the purposes of simplicity it has been
assumed that these effects can be accurately portrayed with a simple perpetual annuity, using an
average value for the additional income. This however does not allow for variations in the number
of future children per participant or for changes to the retirement age.
One of the biggest and most controversial assumptions in this analysis however concerns the
value of human life. Due to the lower incidence of smoking, it is likely that on average the life
expectancy of DECIP participants increases by seven years, from an average of 70 to 77. Many

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 DECIP Case Study Report

studies have been undertaken to put a dollar value on these extra years, and for the purpose of
the study an average of these results has been used in the base case, amounting to $225,000.
The sensitivity analysis will explore this factor further.

Shadow Pricing
Particular attention has been paid to determining a set of economically efficient prices; that is
prices that reflect the true value of any given cost or benefit to society. Without delving too deeply
into the economic theory behind this, shadow prices can be said to incorporate external costs
and benefits which the market participants generally do not consider, as well as account for any
inefficiencies created by government intervention, such as the 10% duties on imported
equipment.
In practice this means that in the efficiency analysis items that are not valued by the market (such
as the time of volunteer help and the opportunity costs of teachers which would be better
employed somewhere else) are included, and the prices for shadow equipment fall by a margin
due to the import duties being accounted for. The specific effects of these changes can be
observed in the Variables Table (Appendix I), as well as by comparing the project analysis to the
efficiency analysis.

Health and old age

The lower incidence of smoking associated with DECIP participants has led us to assume that
health costs will be reduced for every participant on average. Furthermore, previous studies have
shown that smokers can expect lower life expectancies. However, within this analysis the implicit
assumption has been made that this longer life will simply result in positive effects associated
with the assumed value of the persons life. No more health gains or losses result from DECIP
after Year 70, when the average smoker dies. This is unlikely to represent the true situation.
However, since the present value of these cash flows is small and are likely to still be outweighed
by the benefit of a longer life span, the effects of this assumption on the final outcome can be
expected to be relatively minor.

3. Results
As mentioned before, the analysis is done in four parts, but only the final section, the referent
group analysis, is of real importance for the decision maker. It is for this reason that the report will
only take cursory glances at the other sections. The full analyses can be found in the Appendices
II to V.

3.1 Project Analysis

Measured at market prices, most of the benefit of the project goes to the participants and their
families. The education departments initial investments are cancelled out by savings on special
schooling.
Overall the project analysis yields and internal rate of return of 11.6%.

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 DECIP Case Study Report

3.2 Private Analysis

Since the private benefit cost analysis introduces tax payments as well as financing costs, it was
to be expected that both the education department and the participants and their families will
enjoy somewhat lower returns if observed from a private standpoint. Importantly however, IRR is
still positive at 7.8%, making the project worthwhile for them.

3.3 Efficiency Analysis

It should be obvious that many of the benefits of this project are not easily measured by market
prices, and it therefore doesnt come as a surprise that the internal rate of return was found to be
16.2%.

3.4 Referent Group Analysis

Scenario
REFERENT GROUP BCA Base Case Optimistic Pessimistic
NPV (2006)
Education Department -$70,467.0 -$70,467.0 -$70,467.0
DECIP Participants + Families $145,668.0 $171,507.3 $119,828.6
Other State Government $8,504.6 $8,504.6 $8,504.6
Other Community
Victims of Crime $4,641.2 $4,641.2 $4,641.2
Teachers $5,850.6 $5,850.6 $5,850.6
Paid carers -$5,904.2 -$5,904.2 -$5,904.2
Volunteers -$7,906.1 -$7,906.1 -$7,906.1
TOTAL RG Net Benefit $80,387.2 $106,226.5 $54,547.8
Referent Group IRR = 11.2% 11.8% 10.5%

Net Benefit to Federal Government NPV (2006) = $122,530.1

IRR = 71%
Table 3.4.1

The findings of the referent group analysis are as follows:

The Kingsland Education Department faces significant costs in the first five years of the
project as the childhood intervention program takes place. However, after this period it
experiences savings of close to $2000 per child in saved special education expenses.
Once the participants leave high school, tertiary education will again cost the department
for three years. Therefore the education department experiences a loss on aggregate,
with the project having a negative net present value of $70,467 per child.
The main benefactors of this expense are the participants and their families. With
additional earnings by mothers, the extra income for the participants themselves resulting
from improved education as well as savings on healthcare, income of following
generations and a longer life expectancy, the net present value for this group reaches
$145,668 per participant.
Other state government departments experience a more modest gain of $8,504 per child,
due to a decreased incidence of criminal activity and savings on healthcare.

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 DECIP Case Study Report

The rest of Kingslands community experiences a range of different outcomes. The

victims of crimes averted by DECIP would gain $4,641.20 and the teachers who can use
their in-demand skills on alternatives to special schooling enjoy an extra $5,850.60. On
the other hand, paid carers whose clients are no longer in need for their services would
experience a loss of $5,904.20 and DECIP-volunteers would lose out on leisure time
worth $7,906.10 per child.
On the whole, the State of Kingsland and its population would gain an aggregate net
benefit of $80,387.20 per participating child and the project would have a rate of return
on the investment of 11.2%. Assuming the base case holds true, and the predicted
values are correct, this report would therefore recommend the Kingsland government to
undertake DECIP on a large scale.

3.5 The Federal Government

Since the Federal Government in Canberra would serve as a major financier for DECIP, it is of
some interest how much it can expect to gain from the program. This report can conclude that the
Federal Government does quite well out of DECIP. Apart from the loan repayments, increased
income will result in more income tax collections and import duties will also contribute to the
treasury. Furthermore DECIP participants are less likely to require welfare payments during their
life. All things considered, the Federal Government can thus expect a net benefit of $122,530.10
per participant, which equates to an excellent return of 71% on the investment. The Kingsland
Government is therefore advised that securing a Federal loan for DECIP should not be too
difficult.

3.6 Alternative discount rates

The base case described above assumed a discount rate of 5%, which is the generally accepted
standard for the Australian government. However, if interest rates turn out to be lower (for
example 3%) or higher (8%), this may have significant influence on the analysis, and thus
recommendations.
With a drop of the discount rate to 3%, the QLD education department can look forward to a
significantly smaller loss of only $45,921.70. DECIP participants gain about $32,000 more and
paid carers as well as volunteers are also marginally better off. Overall the referent group would
experience an increase in NPV of $61,433.40, a percentage increase of more than 75%. The
Federal Government would gain an extra $36,424.35, or about 30%.
If the interest rate turned out to be higher, for example 8%, the outlook would be somewhat less
rosy. The education departments expenses would explode to more than $130,000 per child and
both paid carers and volunteers would be significantly worse off. DECIP participants would see
an increase in NPV of around $26,000. The result is an aggregate NPV for DECIP of only
$38,533.40, and a Federal Government NPV of less than $100,000. Importantly though, since
both NPVs are still positive and DECIP would still be recommended, it can be said that the
project exhibits a reasonable robustness with respect to changing discount rate. Indeed,

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 DECIP Case Study Report

examining DECIPs IRR tells us that the discount rate must reach 11.2% before the project would
no longer be worth undertaking.

4. Sensitivity Analysis
To test the robustness of the above recommendations to the effects of changing variable inputs,
both a sensitivity- and risk analysis must be undertaken. This is done by simply changing input
data and observing the results of this on the outcome.

4.1 Best Case Scenario

There are two variables that have been identified as particularly open to change, namely the
value of life and the participants income over their lifetimes. Valuing a human life accurately is
of course impossible, as there are both philosophical (how does one value consciousness?) and
practical problems (utility cannot be measured, etc.) associated with it. As a result the attempts to
value human life have come up with widely differing results. While in the base case described
above an average of these results was used, in the optimistic scenario the value of human life is
assumed to be greater, namely $300,000 per year. Since DECIP increases life expectancy by
about seven years, we should see an increase in the projects profitability.
The second variable of interest here is the income of DECIP participants. Over the years
statisticians have developed a range of income brackets corresponding to certain levels of
educational achievement, and the base case assumed that participants would on average earn
the mean value of those brackets. In the optimistic case however, we will assume that
Kingslands youth will significantly outperform other labour market participants and can expect to
always earn the maximum of these income brackets. This increases the difference between
expected income of DECIP participants and non-participants by about $1,100 plus an extra 2%
per year.
The results are as expected. The best case scenario will see the project earn a higher IRR of
11.8% (up by 0.6%) and NPV of $106,226.50 (up $25,839.30). It must be said however that this
improvement will only benefit the participants of DECIP. Neither the education department nor
the rest of Kingslands community will directly benefit.

4.2 Worst Case Scenario

The variables of interest are the same in this case, but in the pessimistic scenario we assume
that the base case overestimated both the value of life and the expected income of DECIP
participants. The value of life is said to be only $150,000 per year, and the lower income reduces
the income differential between participants and non-participants by about $1,100 in the first
year.
Again, these changes dont affect the education department or the rest of Kingsland, but only the
participants of DECIP. As could be expected, the pessimistic case is almost a perfect mirror
image of the optimistic case. NPV goes down by $25,839.30 to $54,547.80 and IRR falls by 0.7%
to 10.5%. It should however be noted that DECIP would still be profitable under these
assumptions, and the government should still go ahead with the project.

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 DECIP Case Study Report

Table 4.2.1 illustrates various outcomes of DECIP, depending on the varying differences in
starting salaries of participants compared to non-participants, holding value of life constant at the
mean (since its effect on DECIPs NPV is relatively small).

Average Income
Differential in Year 21
(growing 2% p.a. from thereon) NPV IRR
$10,000.00 $194,607.7 13.6%
$6,500.00 $132,123.8 12.5%
$5,500.00 $114,271.3 12.1%
$4,500.00 $96,418.7 11.7%
$3,602.00 $80,387.2 11.2%
$2,500.00 $60,713.7 10.5%
$1,500.00 $42,861.1 9.7%
$500.00 $25,008.6 8.5%
$0.00 $16,082.3 7.6%
Table 4.2.1

4.3 Variables of interest to DECIP participants

Income Growth Inequality

During the past decade or so the Western world has experienced an increase in income
inequality. Partly due to the use of more pro-market policies dating back to Reagan and Thatcher,
partly due to globalisation and the resulting opportunities and threats for businesses and people,
it seems that this phenomenon is likely to continue for some time, barring some sort of radical
change.
It may therefore be useful to investigate what an increase in income inequality may mean for
DECIP. In this analysis a base rate of income differential growth of 2% per annum was assumed.
In other words, the difference between high income and low income earners was expected to
increase by 2% every year. An increase of this rate to 5% (which seems entirely possible) has
profound implications for DECIP participants. As the value of being a part of the haves as
opposed to the have nots grows, DECIPs function to move people from low into high income
brackets becomes more valuable as well. Participants see an increase in the NPV of the project
to $194,826.10 (with an overall IRR of 11.9%). That is a plus of almost 30% compared to the
base case. As would be expected, the other members of the referent group see their benefits and
costs unchanged.

Income Taxes
An overall income tax rate of 30% was assumed for the base case. Changes to this would not
only affect the income of working mothers of participants and the participants themselves, but
also future generations which benefit from the higher income. At the same time, all these funds
will go to the Federal Government. Table 4.3.1 illustrates the sensitivity of DECIP to changes in
income tax.

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 DECIP Case Study Report

Average Income Tax Rate Participants NPV DECIP IRR Fed. Gov. NPV
15% $176,410.30 13.5% $91,787.80
30% $145,668.00 11.2% $122,530.13
45% $114,925.60 8.8% $153,272.50
Table 4.3.1

4.4 Variables of interest to the rest of the Kingsland Community

Determining real opportunity costs of any action to an economic agent can be difficult and will
seldom yield 100% correct results. Since particularly the Special Ed teachers whose time will be
saved by DECIP and the volunteers who contribute to it had their NPVs calculated using shadow
prices, it may well be worth investigating the effects of different assumptions.
In the base case, the volunteers leisure time was considered to be worth $1.50 per hour.
However, if we assume that volunteers may find less productive or enjoyable uses for their time
and opportunity costs fell to for example only $0.50, the cost of DECIP to this group falls
significantly by more than $5,000. As a result, referent group IRR experiences a particularly
strong increase to 12.4%.

Volunteers' value of time Volunteers' NPV DECIP IRR

$2.50 -$13,176.8 10.2%
$2.00 -$10,541.4 10.7%
$1.50 -$7,906.1 11.2%
$1.00 -$5,270.7 11.8%
$0.50 -$2,635.4 12.4%
Table 4.4.1
Conversely, if we value the volunteers time more highly at for example $2.50 per hour, volunteer
costs would increase by the same amount, yielding a lower IRR of only 10.2%.

Special Ed teachers opportunity costs were set at 1.25 times the market wage, reflecting the
relative scarcity of their skills and the higher income they could therefore demand. Since the
teachers only make up a relatively small part of the total NPV, DECIPs profitability is not greatly
affected by changes of this opportunity cost. As a general guideline, it can be said that a 10%
change in teachers opportunity costs will result in a 3.35% change in DECIPs NPV.

4.5 Variables of interest to the Education Department

Due to the long life of the project and the relatively short period during which the education
department invests in DECIP, the overall NPV of the project will be influenced most strongly by
changes to the income or expenses of the participants. Nonetheless, with a base case
expenditure of more than $70,000 per child, the education department will be making a
substantial investment.
The largest item of interest is staff salaries. Carers, nurses and the like were assumed to, on
average, cost between $7,500 and $10,000 per child. However, with the current health crisis in
Kingsland not yet solved and a general shortage of child care places, it may not be reasonable to
assume that these wages accurately reflect opportunity costs. Much like the Special Ed teachers,

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 DECIP Case Study Report

these in-demand early childhood specialists may give up lucrative positions. Table 4.5.1 shows
various changes to the average salary paid over the five years of DECIP care, be they through
shadow pricing or simply changing market conditions or variations in the number of applicants.

Change in Average Staff Education Department DECIP

Salaries NPV IRR
$27,500.00 -$150,600.77 5.0%
$15,000.00 -$114,176.31 6.5%
$5,000.00 -$85,036.74 8.9%
$0.00 -$70,466.95 11.2%
-$5,000.00 -$55,897.17 15.4%
-$15,000.00 -$26,757.60 N/A
Table 4.5.1
Knowing that the referent group without the education department experiences a net benefit of
$150,854.10, we can therefore see that DECIP will become financially unviable if the average
salary increases by something just less than $30,000 per year. This may seem unlikely for now,
but it should be kept in mind as one of the biggest risk factors.

5. Risk Analysis

Using @risk statistical software, it is possible to present a continuous distribution of outcomes

depending on the probabilities of certain input variables.

The sensitivity analysis identified two inputs of particular significance to the outcome of DECIP.
The first of these was the relative income growth rate of DECIP participants as opposed to non-
participants. This growth rate was given in the base case to be 2%, but using risk analysis
software, a more continuous and therefore more likely range could be given. For the sake of this
analysis, the differential growth rate was assumed to vary between a minimum of 0% (meaning
that DECIP participants incomes grow at exactly the same rate as non-participants) and 10%
(which could be assumed to be a reasonable if somewhat unlikely maximum). The mean of this
distribution remained 2%.

Appendix VI illustrates the distribution that DECIPs NPV will take. Of particular interest here is
the mean value, given to be $122,279 as well as the standard deviation of $54,884.40. The
distribution is somewhat skewed, indicating the likelihood of the growth rate tending towards a
conservative 2%. Nonetheless, the risk analysis can confirm that DECIPs chances of becoming
a financial failure to Kingsland are near nil. 90% of possible values for the NPV lie between
$70,737.40 and $241,153.40 per participant.

The second variable of interest to be investigated here was the salaries paid to the staff
employed by the education department. Since these form the greatest part of the expenditures,
this is one of the few issues that could make the program become financially unviable.

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 DECIP Case Study Report

Appendix VII shows the distribution of DECIPs NPV when subject to changes in staff salaries.
The salaries were allowed to vary within $10,000 per year above and below the base case
values. Given that these costs would occur in the first few years and prediction should be
possible, plus the possibility of fixing these costs by locking staff into employment contracts,
these ranges seem reasonable. As would be expected, the average and therefore expected net
present value of DECIP is the base case value of $80,327.20. The range is of greater interest.
90% of possible outcomes would sit between $68,556 and $91,919.60. The minimum value was
calculated to be $57,381.40 per child.

Overall the majority of the benefits of the DECIP program come in form of additional income to
the participants. Analysis of the trial period has shown that DECIP produces children that are
more able to cope with the pressures of school and achieve more highly, setting a path towards
better qualifications and jobs. This may make intuitive sense, but it would nonetheless be wise to
investigate the risk of relying on the trial figures. A final risk analysis was therefore run with
regards to the predicted income of DECIP participants.

Appendix VIII shows the result of this analysis. Projected income in the first year of work both of
program participants and non-participants was allowed to vary by up to 25%. It is here that the
programs benefits may be outweighed by the costs. The report shows that outcomes can
potentially vary widely with the starting salaries. The mean is at the base value, as expected, but
with a standard deviation of more than half the mean, 90% of outcomes are spread widely from a
best case of more than $200,000 per child to a worst case minimum of almost $12,000 per child.
In an even gloomier, albeit unlikely scenario of maximum income for non-participants and
minimum income for participants, DECIPs net present value to Kingsland could in fact become
negative.

While this scenario is quite unlikely, it serves as a reminder that DECIPs success is heavily
based on its ability to make children better income earners. If this projection turns out to be
unwarranted, both risk- and sensitivity analysis indicate that the project as a whole would be at
risk of becoming a waste of taxpayer funds.

6. Conclusions and Recommendations

On the whole DECIP has been to be a valuable project to the Kingsland community. Although it
represents a major investment for the states education department, this report concludes that it
is a good one.
The education department itself will spend substantial funds on setting up and running the early
childhood education program. However, most programs this department can expect to undertake
do not have direct financial benefits, and it is seldom indeed that the education department will
begin a project and expect positive cash flows from it.

Florian Weltewitz 14/15

 DECIP Case Study Report

The major benefits of the program go to the children who actually participate, as well as their
parents and following generations. Through improving performance at school, DECIP participants
have a higher chance of successfully completing tertiary education and will overall earn a
substantially higher income throughout their working lives. At the same time their parents will be
able to find alternative uses for the time as the need for supervision is reduced. Stay at home
mothers will be join the labour market and future generations will profit from growing up in higher
income households.
The benefits to the rest of Kingslands community are not clear-cut, and distributional effects
should be expected. Volunteers who lose spare time can be said to lose out, although welfare
effects would be minimal at best. More substantial would be the costs to the paid childcare
industry, the market of which will see a reduction in size. On the other hand teachers are freed
somewhat from the burden of providing special education for failing students, and the reduction in
the likelihood of criminal activities by DECIP participants will provide real positive effects to the
wider community.
These results are quite robust with regards to changing assumptions about input variables. While
there may be changes in the magnitude of cash flows, the direction is more or less impervious to
change. Perhaps the most vital variable subject to change are the costs of inputs for providing
DECIP, staff wages forming the biggest share of these. With the current shortage of qualified
nurses and childcare staff, increases in wages are to be expected, and these can raise the costs
to the education department significantly. The project may overall still worthwhile, but with the
department facing a limited budget alternative uses thereof may become more attractive.
Perhaps the major weakness of this investigation is the failure to consider the wider long-term
economic effects. Above and beyond mere increased wages, a more educated populace can
provide significant benefits to Kingslands national and international economic competitiveness.
Recognising therefore that this assessment of DECIP is more likely to understate the projects
benefits than overstate them, this report unequivocally advises the Kingsland government in
general and the education department in particular to make DECIP a fixed institution and use it to
cement Kingslands position as a Smart State.

Florian Weltewitz 15/15