Question

Your client, Brooke, decides to start saving for her son's college tuition. Her son was born today and will go to college at age 18 for four years. Brooke wants to save until her son's first year of college. Given the following information, what is the present value of the total amount that Brooke needs to have saved at the beginning of her son's first year of college? Current tuition: $16,000 Tuition inflation: 6.5% Brooke's investment return: 10%

$29,202

$39,010

$34,090

$31,105

Answer 1

HI

Here Present tution fees P = $16,000

inflation = 6.5%

hence tution fees after 18 years = 16000*(1+6.5%)^18

   = $49,706.47

At 19th year tution fees = 16000*(1+6.5%)^19 = $52,937.39

At 20th year tution fees = 16000*(1+6.5%)^20 = $56,378.32

At 21th year tution fees = 16000*(1+6.5%)^20 = $60,042.91

investment return r = 10%

first payment at 18 years hence

Present Value of fees = 49706.47/1.1^18 + 52937.39/1.1^19 + 56378.32/1.1^20 + 60042.91/1.1^21

   = 8940.15 + 8655.69 + 8380.28 + 8113.63

   =$34,089.74

hence $34,090 is correct option here.

Thanks