Question

Assume that you would like to make 6 yearly deposits for your kid’s college tuition fee starting today. The initial deposit for today is $10000 dollars and each year the amount increases by $1000. The interest rate is assumed to be 8% per year.

a) Draw the cash flow diagram (CFD).

b) Assuming that your kind needs the tuition money as a lump-sum amount, 10 years from now.

Find the total amount of money that will be accumulated in the bank by that time.

c) Assume that you would like to change the deposit schedule such that payments start 5 years

from now and ends ten years from now (i.e. the time when tuition is due). Further assume that the payments follow a uniform series that is economically equivalent to the payment schedule in part a). Draw the CFD for the equivalent series and find the corresponding annual payment amount.

Answer 1

Part (a).

Cash flow Diagram

Part (B)

Part (c).

Cash flow Diagram for the New series

Good luck!!