Question

Please show the step-by step calculation (as if you were using a financial calculator) to find out how much money is needed in lump-sum pay for two children's education (Age 10 and Age 12), assuming they begin college at age 18. Assume that inflation rate for tuition is 4.5%.

Then, find out how much they would need in lump-sum if they had $40,000 for each child (80k total) and that money earned a 7% rate of return.

Please show work - thanks!

Answer 1

	Child one	Child two	Total
Current age	10	12
Begin college	18	18
Time to college	8	6
Inflation rate	4.50%	4.50%
Interest rate	7%	7%
Amount invested - A	40000	40000
Reall Interest rate (Total interst rate - inflation rate)	1.035	1.035
Real Interest to the power of time to college - B	1.3168	1.2293
Amount at 18 years of age (Actual interst (B) * Amount Invested (A))	52,672	49,170	101,843
Total lumpsum amount needed is 101, 843 for both the kids