(individual) By investing $20,000 (income foregone and other expenses) for each of the next 5 years in a college educations, Jack and Jill can reasonably expect to enhance their earning power by $10,000 per year for the following 25 years.
- Use Table 11-3 in Chapter 11 to decide whether this would be a good investment for Jill, who discounts at 3 percent.
Putting the starting point at the end of the 5 years of education (for easy comparison's sake): the present value of a $10,000 annuity discounted at 3% over 25 years is $174,131. The compounded value of $20,000 at 3% in 5 years is $23,060 (which assumes the cost came at the beginning of the education and that bank interest rates would at least keep up with inflation).
- Is it a good investment for Jack, who discounts at 9 percent?
$98,226 vs. a cost to him of $30,772. It's a good investment for him as well. Just not as good as Jill.
- How is the wisdom of the investment affected by the fact that both Jack and Jill love learning?
They'd have to really love learning to give up that much money.
