Question

Present value. Prestigious University is offering a new admission and tuition payment plan for all alumni. On the birth of a child, parents can guarantee admission to Prestigious if they pay the first year's tuition. The university will pay an annual rate of return of 6% on the deposited tuit on, and a full re und will be available fthe child chooses another university. The tuition is expected to be $22,000 a year at Prestigious 19 years from now. What would parents pay today if they just gave birth to a new baby and the child will attend college in 19 years? How much is the required payment to secure admission for their child if the interest rate falls to 4%? What would parents pay today if they just gave birth to a new baby and the child will attend college in 19 years? (Round to the nearest cent.)

Answer 1

a) FV of tuition fees after 19 years = 22,000
PV of tuitions today = 22000/(1+6%)¹⁹ = 7271.29

The parents will pay today = 7271.29

b) at rate = 4%
PV of tuitions today = 22000/(1+4%)¹⁹ = 10422.13

The parents will pay today = 10422.13

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