Question

Mr. Chan is setting a saving target in order to pay for his son’s college tuition. His son is currently 6 years old and will begin college when he turns 18 years old. Currently total college expenses for 4 years is $473,000, but are expected to grow at 3% per year. Mr. Chan can earn 7% on his savings. How much should the saving target of Mr. Chan be? That is, the amount needed for the college expenses when his son turns 18 years old?

Answer 1

College Fees per year(assuming it is equal every year) = 473000/4 = $118250

Year	Tuition Fees	Discounting Factor [1/{1.07^(year-18)}	PV at year 18 (Total Tuition Fees* Discounting Factor)
18	118250	*(1.03^12)=	168596.2249	1	168596.2249
19	168596.2249	*(1.03)=	173654.1116	0.934579439	162293.5623
20	173654.1116	*(1.03)=	178863.735	0.873438728	156226.5132
21	178863.735	*(1.03)=	184229.647	0.816297877	150386.2697
				Sum of PVs   =	637502.57

Therefore, Mr Chan MUST have $637502.57 in Savings when his son turns 18 years old, so that he can pay the fees for 4 years.