Question

15 years from now, your 2-year old son will be attending Harvard. You have determined he will need $70,000 per year for tuition and living expenses. In 15 years, you will give him a lump sum payment for the entire amount he will need, assuming that he will be able to invest the money not yet needed at 5% interest. You have found an investment opportunity that will yield an annual return of 7% on your monthly payments. How much will you have to invest each month to give your son the money he needs for his education (assume his first year at Harvard is Year 0, and his final year is Year 3)?

Answer 1

First we calculate the PV of the amount needed at the start of Harvard

Using excel function PV

Hence, the son needs a lump sum amount of $260627.36 at the end of year 15 from now

Now we calculate the monthly payments needed to reach the lump sum amount

Hence, the monthly payments needed are $822.27