Question

Tony has two children, Angelo age 8 and jessica age 5. Tony wants to provide for their education funding Currently, tuition is $12.000 per year and tuition inflation is 6. Tony expects to earn 8% on his investments and he expects the children to start college at age 18 and go to college for 4 years. Tony wants his last savings payment to be made when the oldest child starts college. How much must Tony save at the end of each year? a. 511.227.32 b. $10.395.67 c. $12.327.45 d. 59,693.49

Answer 1

Answer:

Correct answer is:

a. $11,227.32

Explanation:

Angelo's age now = 8

Jessica's age now = 5

Hence:

Angelo will be going to college (18 - 8=) 10 years from now

Jessica will be going to college (18 - 5 =) 13 years from now

College education is for 4 years

  

Amount required 10 years from now = 12000 * (1 + 6%) ^10 = 21490.17

Amount required 11 years from now = 12000 * (1 + 6%) ^11 = 22779.58

Amount required 12 years from now = 12000 * (1 + 6%) ^12 = 24146.36

Amount required 13 years from now = 2 * 12000 * (1 + 6%) ^13 = 51190.28

Amount required 14 years from now = 12000 * (1 + 6%) ^14 = 27130.85

Amount required 15 years from now = 12000 * (1 + 6%) ^15 = 28758.70

Amount required 16 years from now = 12000 * (1 + 6%) ^16 = 30484.22

We tabulate below these amounts and using NPV formula of excel, calculate the PV (at the end of year 10 from now) of all these amounts:

At the end of year Amount Required 21,490.17 22,779.58 24,146.36 51,190.28 27,130.85 28,758.70 30,484.22 PV at the end of Year 10 162,645.38

We will use the PMT formula of excel to calculate the yearly saving:

=PMT (rate, nper, pv, fv, type)

= PMT (8%, 10, 0, -162645.38, 0)

= $11,227.32

Hence option a is correct and other options b, c and d are incorrect.