Question

Consider investing into your child's education. If you don't have a child, imagine you do or consider investing into your nephew:) Come up with assumptions (how much more your child is going to make, when they start making this difference in income, for how long, etc.). Evaluate this project using rate of return 10%

Answer 1

Investing in a child's education can yield significant economic gains, with an estimated 10 to 20% annual wage increase per year of education, resulting in a higher lifetime income when evaluated at a 10% rate of return.

Step-by-step explanation:

The investment in a child's education can be analyzed by considering additional income that results from higher education levels. Assuming an average wage increase of 10 to 20% per year of education, let's hypothesize that investing in your child's education leads them to earn 15% more annually over someone without such investment. If they start earning this additional income at age 25 and continue until retirement at 65, using a 10% rate of return to evaluate this project would require discounting these additional earnings back to the present value to assess the investment's worthiness.

For instance, saving $3,000 in a diversified stock portfolio at a 7% real annual rate of return, which is 7% above inflation, results in a substantial growth over 40 years. The formula for compound interest indicates that the initial $3,000 investment would grow to $44,923 in 40 years: 3,000(1+.07)40 = $44,923.