King Rat (gkr) wrote,
King Rat

Eco 200: college

(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.

  1. 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).

  2. 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.

  3. 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.


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