Question

Mary and Joe want to send their six (6) year old daughter Sarah to College when she reaches the age of 18. They want to pay for her four (4) year education at a local college. The current tuition today is $8,200 annually. The couple estimates that college costs will continue to inflate at 6%, and that they can earn 8% after-tax on their invested assets. How much do they need to Invest Today to open a new 529 Plan with you, to fund their goal? a. $25,018 b. $26,210 c. $25,490 d. $64,189

Answer 1

Daughter will go to college in 12 years

annual cost in 12 years = current fee*(1+inflation rate)^12 = 8200*(1+0.06)^12=16500.011

annual cost in 13 years = current fee*(1+inflation rate)^13 = 8200*(1+0.06)^13=17490.01

annual cost in 14 years = current fee*(1+inflation rate)^14 = 8200*(1+0.06)^14=18539.41

annual cost in 15 years = current fee*(1+inflation rate)^15 = 8200*(1+0.06)^15=19651.77

amount to be invested today is present value of all these cash outflows

=cost year 12/(1+after tax return)^12+cost year 13/(1+after tax return)^13+cost year 14/(1+after tax return)^14+cost year 15/(1+after tax return)^15

=16500.011/(1+0.08)^12+17490.01/(1+0.08)^13+18539.41/(1+0.08)^14+19651.77/(1+0.08)^15

=25490