Question

Your daughter is considering two options for her career. The first is to go to law...

Your daughter is considering two options for her career. The first is to go to law school at Harvard. You estimate this will cost you $500,000 and you will have to pay this in one lump sum 5 years from today.

Her alternative choice is to go to Europe to musical conservatory. For this option she will need a violin worth $100,000 which you need to buy now. The cost of her schooling will be $100,000 per year for 3 years starting in 2 years. That is, in 2 years you will need $100,000, another $100,000 in 3 years and another $100,000 in 4 years.

If interest you can achieve is 10% compounded annually which option requires less money if you invest today to cover these educational expenses?  

(SHOW YOUR WORK)

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Homework Answers

Answer #1

Option 1requires less money if investment is done today

Explanation:

Option 1

Present Value (PV) = FV / (1+r)nPV = $500,000 / (1+0.1)5

=$310,460.662

Option 2

Violin;

PV = $100,000

Schooling

PV = $100,000 / (1+0.1)2

= $82,644.6281

PV = $100,000 / (1+0.1)3

= $75,131.4801

PV = $100,000 / (1+0.1)4

= $68,301.3455

Total PV =$326,077.454

Option 1requires less money

hope you got the answer, please comment for any clarification

Thankyou and all the best for future

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