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Case Study In this case study, you have been hired to advise the Department of Education on a pilot project. Across the country, getting young people betwe

Case Study In this case study, you have been hired to advise the Department of Education on a pilot project. Across the country, getting young people betwe

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Case Study In this case study, you have been hired to advise the Department of Education on a pilot project. Across the country, getting young people between the ages of 16 and 18 to remain interested in attending school and preparing for college is a big challenge. The department is concerned that this limited interest in schooling on the part of 16- to 18-year-old youths will have a negative impact on the country’s long-term development prospects, including a shortage of the skills needed by industry that will lead to reduced economic growth and increased poverty. In an attempt to encourage learning among people in this age group, the department has developed a new business model for learning that is specifically targeted to these youngsters. The new model of learning is designed to entice 16-to 18-year-olds to remain in school and has been advertised extensively in the media. It has also been branded and is called Cool Learning (this is a fictitious name). However, before rolling out Cool Learning across the country, the department would like to pilot it in two areas. The pilot will start in the coming academic year and will cover the selected two areas, whereas in all other areas, the current format (the Base Case model) of teaching will continue to be used. CHAPTER SEVEN

CASE STUDY 2:
Options Appraisal

In this chapter, we will focus on an options appraisal case study. In this case study, you have been hired to advise the Department of Education on a pilot project. Across the country, getting young people between the ages of 16 and 18 to remain interested in attending school and preparing for college is a big challenge. The department is concerned that this limited interest in schooling on the part of 16- to 18-year-old youths will have a negative impact on the country’s long-term development prospects, including a shortage of the skills needed by industry that will lead to reduced economic growth and increased poverty. In an attempt to encourage learning among people in this age group, the department has developed a new business model for learning that is specifically targeted to these youngsters. The new model of learning is designed to entice 16-to 18-year-olds to remain in school and has been advertised extensively in the media. It has also been branded and is called Cool Learning (this is a fictitious name). However, before rolling out Cool Learning across the country, the department would like to pilot it in two areas. The pilot will start in the coming academic year and will cover the selected two areas,whereas in all other areas, the current format (the Base Case model) of teaching will continue to be used.

7.1 BASE CASE

The Base Case model is the current approach to learning, in which students attend high school for three or four years. We are specifically interested in what happens during the last two years of high school (the 16 to 18 year olds); at the end of which students who pass their final exams graduate and go on to college. The Base Case model has been used for years, and we know both average pass rates and the cost (to the government) per student. The cost is measured in terms of the amount of money spent by the government on providing learning. The benefit is measured in terms of the number of students and the pass rate (defined as the number of students who qualify to go on to college divided by the number of students).
The Base Case key inputs are:

 Cost per student in previous academic year

 Pass rate

7.2 COOL LEARNING PROGRAM

The Cool Learning model does not change either the content of the learning or the time it takes to complete it (two years). It simply repackages the learning in order to make it more attractive to the students or learners. It involves giving each student or learner an account with the department (similar to having a bank account) that keeps track of which subjects the student has enrolled in, the course work status, and other such information. The student’s account is available on the Internet. The student is also given a card, similar to a credit card, that shows his name and a unique number. Providing the student with an online account and a card lets him feel empowered (have a sense of being in control of his learning), and it is expected that this feeling of empowerment will result in a greater desire to learn. Thus, the aim of the Cool Learning program is to achieve greater learning participation among 16-to 18-year-olds. This will be tested in the Cool Learning pilot project.
The Cool Learning pilot key inputs are:

 Learning cost in pilot area A.

 Learning cost in pilot area B.

 Additional costs. These are costs that are not going into learning. They would not be incurred under the Base Case model, so they are indeed additional. They include the following:
     Additional spending in each of the pilot areas
     Finance
     IT systems for the online platform
     Evaluation
     Marketing and communications

7.3 REQUIREMENTS

As an advisor, your job is to help the department appraise the Cool Learning pilot and compare it with the Base Case option (that is, the last two years of high school). The key question for the department is as follows: should we invest in Cool Learning, or should we put the money into the existing Base Case model? What would it take for Cool Learning to be a worthwhile investment?

7.4 FINANCIAL MODELING

This case study is what is often referred to as an options appraisal case, in which we are comparing multiple options or scenarios. In our case, we have two options to compare: Base Case and Cool Learning. Please note that the Base Case option is often referred to as the Do Nothing option and is always a possibility. Indeed, the Department of Education could decide that Cool Learning is not an option and so carry on with its current approach to learning.
For each option, we need to evaluate the cost of that option, the number of students involved, and, based on an assumed pass rate, the number of students qualified for admission to college. Once these results are known, it will be easier to make an informed comparison of the two options.

7.4.1 Base Case Model

The Base Case is the way learning at the high school level (that is, for students aged 16 to 18) has been carried out in the country for many years. Good statistical data are available, and based on this, the average cost per student for the previous academic year is known. We also know the success rate during that academic year, which is in line with historical pass-rate levels.

Inputs

 Cost per learner. Based on inflation forecasts, it is possible to project the historical cost per learner for Years 1 and 2.

 Success rate. This is assumed to be equal to the pass rate for the previous academic year.

 Funds available for learning. The budget that would have been spent on providing learning to the students using the Base Case model in those two areas is known. However, to ensure that we are comparing both options on the same basis, we will take the funds available for learning in the Base Case model as being those available with the Cool Learning model (discussed in the next section).

Specifications

 Number of learners. This is calculated as funds available for learning divided by the projected cost per learner.

 Number of high school qualifications (or number of students qualified for admission to college). This is calculated as number of learners times the success rate.

 Cost per high school qualification. This is calculated as funds available for learning divided by number of high school qualifications.

7.4.2 Cool Learning Pilot

The Cool Learning model is the new approach to learning.

Inputs

 Number of learners budgeted for Cool Learning. This is known, since these are the students between the ages of 16 and 18 in the two pilot areas. It is just that instead of enrolling under the Base Case model, these students will enroll through Cool Learning.

 Cost of learning. Likewise, the budget that would have been spent on providing learning to these students using the Base Case model will be used to fund the new Cool Learning model in those two areas.

 Additional implementation costs. In addition to the standard amount of funds provided for Cool Learning in each of the two areas, the department has provided further funding for additional costs required to implement the new scheme.

 Success rate. This is assumed to be equal to the pass rate for the previous academic year. Note that Cool Learning is expected to increase students’ interest in learning, and so the pass rate should increase. But to be conservative, the pass rate is assumed to be identical to that of the Base Case model.

Specifications

 Funds available for learning. This is calculated as the sum of the cost of learning and additional implementation costs, and it represents the total amount available for spending under Cool Learning. Since we are comparing the Base Case model with the Cool Learning model, both options will use the same funds available for learning.

 Cost per learner. This is calculated as the cost per learner under the Base Case plus the additional implementation costs budgeted for Cool Learning divided by the number of learners.

 Number of learners. This is calculated as funds available for learning divided by the projected cost per learner.

 Number of high school qualifications. This is calculated as the number of learners times the success rate.

 Cost per high school qualification. This is calculated as funds available for learning divided by number of high school qualifications.

 Break-even success rate. One of the key questions you must help the department answer is what it would take for Cool Learning to be a worthwhile investment. One way of approaching this question is to think in terms of the number of qualifications achieved under the Cool Learning pilot. Ultimately, the department is looking to achieve a large number of high school graduates who are eligible to go on to college. And so in order for the Cool Learning pilot to be worthwhile, it will have to achieve at least the same number of high school qualifications as the Base Case. But we know that the cost per student for Cool Learning is higher than that for the Base Case because in addition to the Base Case cost per student, we have to add the additional Cool Learning implementation cost per student. Therefore, in order to achieve at least the same number of qualifications in Cool Learning as in the Base Case, the success rate with Cool Learning must be higher than the success rate with the Base Case model.

7.5 BUILDING THE FINANCIAL MODEL

We will create a new workbook in which we will build the Cool Learning financial model. The model will be annual, with two projection years: Year 1 and Year 2, focusing on the last two years of high school. There will be two groups of inputs: Base Case inputs and Cool Learning inputs, as described previously. The model itself is not too big, and so we will build the inputs, calculations, and outputs in the same sheet.

7.5.1 Timeline

 We will assume that we are nearing the end of academic year 2012. The Cool Learning pilot will start in the next academic year, 2013, and will run for two academic years: 2013 and 2014.

 We have two complete historical academic years, 2010 and 2011, and one almost-complete academic year, 2012.

 We can write the timeline in row 3. Let us say that cell J3 contains academic year 2010, cell K3 contains academic year 2011, cell L3 contains academic year 2012, cell M3 contains academic year 2013, and cell N3 contains academic year 2014.

7.5.2 Inputs

 Inflation rate. We can write the historical and forecasted inflation rates on row 8 as follows: the historical inflation rate for 2010, 2011, and 2012 was 5 percent, and the forecasted inflation rate for 2013 and 2014 is also 5 percent.

Base Case Inputs

 Cost per learner ($). In cell J11, we write the cost per learner as $1,500.

 High school success rate. In cell J12, we write the high school success rate as 40 percent.

 Number of high school learners budgeted for in the pilot areas (A and B). In cell J13, we write the number 2,000, which represents the number of high school learners budgeted for in the pilot areas (A and B).

Cool Learning Inputs

 Learning cost in pilot area A, $000. In cells M16 and N16, we write the figure $2,600.

 Learning cost in pilot area B, $000. In cells M17 and N17, we write the figure $2,600.

 Total cost of learning. In cell M18, we write the formula “=SUM(M16:M17)”. Copy cell M18 and paste the formula into cell N18.

 Additional pilot costs, $000:

     Area A. In cells M21 and N21, we write the additional pilot cost as $200.
     Area B. In cells M22 and N22, we write the additional pilot cost as $100.
     Finance. In cells M23 and N23, we write the additional pilot cost as $70.
     Systems. In cells M24 and N24, we write the additional pilot cost as $50.
     Evaluation. In cells M25 and N25, we write the additional pilot cost as $50.
     Marketing and communications. In cells M26 and N26, we write the additional pilot cost as $280.
     Total additional costs. In cell M27, we write the formula “=SUM(M21:M26)”. Copy cell M27 and paste the formula into cell N27.
The Inputs section of the Cool Learning model is illustrated in 
Figure 7.1
.

FIGURE 7.1 COOL LEARNING (INPUTS)

7.5.3 Calculations—Base Case

Projected Cost per Learner ($)

In cell K32, we can write the formula “=IF(K3=2011,J11*(1+K8),J32 *(1+K8))”, which calculates cost per learner after inflation for 2011 as being equal to cost per learner in 2010 times 1 plus the 2011 inflation rate if we are in 2011. Otherwise, cost per learner after inflation in Year t is equal to the cost per learner after inflation in Year t – 1 times 1 plus the inflation rate.
Copy cell K32 and paste the formula into the block K32:N32.

Learning Cost in Pilot Area A, $000

In cell M34, we write the formula “=M16”, which picks up the learning cost in pilot area A from the Inputs section.
Copy cell M34 and paste the formula into the block M34:N34.

Learning Cost in Pilot Area B, $000

In cell M35, we write the formula “=M17”, which picks up the learning cost in pilot area B from the Inputs section.
Copy cell M35 and paste the formula into the block M35:N35.

Total Additional Costs

In cell M36, we write the formula “=M27”, which picks up the additional costs from the Inputs section.
Copy cell M36 and paste the formula into the block M36:N36.

Total Funds Available Under Base Case

In cell M37, we write the formula “=SUM(M34:M36)”, which calculates the total funds available under the Base Case as the sum of the learning cost in pilot area A, the learning cost in pilot area B, and total additional costs.
Copy cell M37 and paste the formula into the block M37:N37.

Number of Learners

Assume that the same cohort moves from Year 1 to Year 2.
In cell M39, we write the formula “=SUM(M37:N37)*1000/N32”, which calculates the number of learners as total funds available under the Base Case times 1,000 divided by the after-inflation projected cost per learner in 2014.

High School Success Rate

In cell M40, we write the formula “=J12”, which picks up the high school success rate from the Inputs section.

Number of High School Qualifications

In cell M41, we write the formula “=M40*M39”, which calculates the number of high school qualifications as equal to the high school success rate times the number of learners.

Cost per Qualification ($)

In cell M42, we write the formula “=SUM(M37:N37)*1000/M41”, which calculates the cost per qualification ($) as equal to the sum of the total funds available under the Base Case for both Year 1 and Year 2 times 1,000 divided by the number of high school qualifications.
The Base Case model is illustrated in 
Figure 7.2
.

FIGURE 7.2 COOL LEARNING (BASE CASE)

7.5.4 Calculations—Cool Learning Pilot

Projected Cost per Learner ($)

In cell M45, we write the formula “=M32”, which picks up cost per learner after inflation from the Base Case calculations.

Number of High School Learners Budgeted

For in the Pilot Areas (A and B)

In cell M46, we write the formula “=J13”, which picks up the number of high school learners budgeted for in the pilot areas (A and B) from the Inputs section.

Cool Learning Additional Costs

In cell M47, we write the formula “=M27”, which picks up the Cool Learning additional costs from the Inputs section.
Copy cell M47 and paste the formula into the block M47:N47.

Estimated Cost per Learner (Cool Learning)

In cell M48, we write the formula “=SUM(M47:N47)*1000/M46+M45”, which calculates the estimated cost per learner as the sum of the Cool Learning additional costs in Year 1 and Year 2 times 1,000 divided by the number of high school learners budgeted for in the pilot areas (A and B) plus the projected cost per learner ($).

Total Funds Available Under Cool Learning

In cell M50, we write the formula “=M37”, which picks up the total funds available under Cool Learning from the Base Case.
Copy cell M50 and paste the formula into the block M50:N50.

Number of Learners in the Pilot

Assume that the same cohort moves from Year 1 to Year 2.
In cell M52, we write the formula “=SUM(M50:N50)*1000/M48”, which calculates the number of learners in the pilot areas as the sum of the total funds available under Cool Learning for Years 1 and 2 times 1,000 divided by the estimated cost per learner (Cool Learning).

High School Success Rate

We assume that this is the same as in the Base Case. Therefore, in cell M53, we write the formula “=M40”, which picks up the high school success rate from the Base Case model.

Number of High School Qualifications

In cell M54, we write the formula “=M53*M52”, which calculates the number of high school qualifications as the number of learners in the pilot areas times the high school success rate.

Cost per Qualification ($)

In cell M55, we write the formula “=SUM(M50:N50)*1000/M54”, which calculates the cost per qualification ($) as equal to sum of the total funds available under Cool Learning for both Year 1 and Year 2 times 1,000 divided by the number of high school qualifications.
Next, we need to calculate the minimum pass rate required in the pilot areas to achieve the same number of qualifications as in the Base Case.

Number of High School Qualifications in the Base Case

In cell M59, we write the formula “=M41”, which picks up the number of high school qualifications in the Base Case from the Base Case section.

Number of Learners in the Pilot Areas

Assume that the same cohort moves from Year 1 to Year 2.
In cell M60, write the formula “=M52”, which picks up the number of learners in the pilot areas from the Cool Learning pilot section.

Minimum Pass Rate Required in Pilot to Break Even

In cell M61, we write the formula “=M59/M60”, which calculates the minimum pass rate required in the pilot to break even as being equal to the number of high school qualifications in the Base Case divided by the number of learners in the pilot areas (assume that the same cohort moves from Year 1 to Year 2).
The Cool Learning pilot is illustrated in 
Figure 7.3
.

FIGURE 7.3 COOL LEARNING PILOT

7.5.5 Outputs

We will present the model output in a simple summary table showing side-by-side key results from the Base Case and the Cool Learning pilot. Key results we will show include the following:

 Learning costs ($000)
For the Base Case model, in cell I67, we write the formula “=M37+N37”, which aggregates the learning costs across Years 1 and 2 in the Base Case.
For the Cool Learning pilot, in cell L67, we write the formula “=I67”, which picks up the same learning costs from the Base Case.

 Number of learners
For the Base Case model, in cell I69, we write the formula “=M39”, which picks up the number of learners under the Base Case from the Base Case section.
For the Cool Learning pilot, in cell L69, we write the formula “=M52”, which picks up the same number of learners from the Cool Learning section.

 Pass rate
For the Base Case model, in cell I70, we write the formula “=J12”, which picks up the pass rate from the Input section.
For the Cool Learning pilot, in cell L70, we write the formula “=I70”, which picks up the same pass rate as for the Base Case.

 Number of qualifications
For the Base Case model, in cell I71, we write the formula “=M41”, which picks up the number of qualifications under the Base Case from the Base Case section.
For the Cool Learning pilot, in cell L71, we write the formula “=M54”, which picks up the number of qualifications from the Cool Learning section.

 Cost per qualification ($)
For the Base Case model, in cell I72, we write the formula “=M42”, which picks up the cost per qualification ($) under the Base Case from the Base Case section.
For the Cool Learning pilot, in cell L72, we write the formula “=M55”, which picks up the cost per qualification ($) from the Cool Learning section.

 Pass rate required in pilot to break even (same number of qualifications as in the Base Case)
For the Base Case model, in cell I73, we write the formula “n/a” to indicate that this is not applicable under the Base Case.
For the Cool Learning pilot, in cell L73, we write the formula “=M61”, which picks up the pass rate required in the pilot to break even (same number of qualifications as in the Base Case) from the Cool Learning section.
The Outputs section is illustrated in 
Figure 7.4
.

FIGURE 7.4 COOL LEARNING OUTPUTS
However, for presentational reasons, we will move the Outputs section to the top. To this end, we need to do the following:

 Cut rows 63 to 76.

 Insert the cut rows in row 5.
The result is now as shown in 
Figure 7.5
.

FIGURE 7.5 COOL LEARNING FINAL OUTPUTS

7.6 ANALYSIS

 In total, the department has a budget of $11.9 million to spend on high school learning (that is, for 16- to 18-year-old students) in the pilot areas A and B. The money is currently earmarked for the Cool Learning pilot. However, if the department were to carry on with the Base Case approach, it would expect to train 6,527 students across these two areas. Assuming a 40 percent pass rate, then 2,611 qualifications would be achieved, giving a cost per qualification of $4,558.

 If the $11.9 million were to be spent on implementing the Cool Learning pilot, then the cost per student would be higher because a portion of the $11.9 million ($1.5 million across Years 1 and 2) would be used to set up IT accounts, finance, and so on. As a result of the higher cost per student, the number of students is lower than under the Base Case, 4,786 students. Therefore, at the same pass rate of 40 percent as in the Base Case, Cool Learning would achieve fewer qualifications, 1,914.

 In order for Cool Learning to achieve the same number of qualifications as in the Base Case (which is 2,611), it would need to achieve a 54.55 percent success rate, which is higher than the historical 40 percent success rate. Given the historical 40 percent success rate, one can wonder whether a 54.55 percent success rate is realistic. This is a judgment call that the financial model cannot answer. But at least the model can inform the Department of Education what it would take for the Cool Learning scheme to be worth the investment.

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