People sell (and buy) all sorts of weird things on eBay, but I found Ron Steen's offer to sell 2% of all his future earnings for USD 100,000.00 or more [saved PDF copy here] quite unusual. My first reaction was that it is just a prank by a bored teenager to gain some publicity. However, the attention to details and clarity in listing description and answers to questions [saved PDF copy here] seem to imply that Ron is a serious seller. This is also confirmed by many positive feedback to his (or his father's) eBay account.
I should point out that at the time of this post (1pm Pacific Time, Aug. 11, 2006), no bids have been placed.
Leaving aside the issue of unusual nature of the offering, I thought it would be interesting to do a Return on Investment (ROI) analysis of the proposal. It would also have practical value. Afterall, what Ron is offering could be offerred by other entrepreneurial youngsters and if he is successful then it is quite likely that many others will follow suit. This model of financing education may even emerge as a viable competitor to other loan-based programs.
Assuming that he gets a regular job in 2012 after graduation, leads a normal working life for 40 years and retires in 2052. Btw, these are the numbers he cites in the offer description. As per his claims, he plans to earn upto USD 30 millions, but let us leave that aside for a moment as a wishful thinking and assume that his annual earnings will start at a fixed amount and keep growing at a constant rate over all his working life. We will also account for inflation by assuming a fixed inflation over the whole 40 year period from 2012 to 2052.
Of course, these assumptions are simplistic. Annual earning growth rate or inflation rate rarely grow at constant pace. Also, there is always a chance that Ron makes it big and earns a lot more than even his own projection of 30 million. on the other hand, it is also possible that he turns out to be loser and doesn't earn much or meets an accident and becomes incapacitated or dies (sorry for these morbid thoughts, but these things do happen and need to be accounted for in any sound business analysis). In sum, I would imagine that the upside potential matches the downside risk, making my ROI analysis assumptions not very off the mark. Though, it would be interesting to look at statistical numbers on past accidents and cases of signficantly better-than-average income.
Let us get back to the analysis. Assuming that Ron's starting annual income will be USD 50,000 in 2012 and will grow at the annual rate of 6% against the annual inflation rate of 4% -- incomes usually rise faster than inflation -- what would be the Net Present Value(NPV) of the profit (NPV of the future payouts minus initial investment of USD 100,000)? I did this calculation and came out with the figure of USD -53051.43. Yes, a loss of more than 53 thousand dollars! This despite the fact that Ron will earn more than 7 million doallrs over his working life in terms of current dollars. In fact, the investment will be a loss, albeit a smaller one, if I were to bump up the Ron's starting annual income to USD 100,000.
I wrote a small JavaScript program to do these calculations (first I tried using an online spreadsheet that I could share with others but gave up after unsuccessfully struggling with Google Spreadsheets for more than an hour, but that is going to be a story for another blog post). Lateron, I enhanced this program to allow changing the various parameters (such as initial investment, starting income, income growth rate and inflation rate) and show the detailed calculation with a workable browser based GUI. So, now anyone, even you, can use my program to compute Return On Investment for Ron Steen's Auction.