Question

Mr. and Mrs. Smith own a villa in Palm Jumeirah, Dubai. Mr. Smith is partner in a Pharmaceutical Company. Mrs. Smith stays home with their child, Harry, who is age five. Until recently, the Smith's have felt very comfortable with their financial position. After visiting Holborn Assets Ltd., a family financial planner, the couple became concerned that they were spending too much and not putting enough funds aside for both their child's future education needs and their own retirement. Mr. Smith earns $85,000 per year, but with the rising costs of education, their past contribution efforts have left them short of their financial goals. To estimate the amount of money the Smith's need to begin putting away for future security, some general information was obtained by their financial planner. The couple felt that the amount of money they currently contribute to their saving account would be sufficient for their retirement needs. What they had not accounted for was Harry's education. Mr. Smith is a graduate of American University Dubai, a private university with an extremely high tuition fee of approximately $20,000 per year. Mrs. Smith graduated from the British University Dubai. The tuition expense there is only $2,500 per year. When Harry turns 18, the couple wishes to send him to either of these exceptional universities. They have a slight preference for the American University. The problem, however, is that with the rate at which tuition fee is increasing the Smiths are not sure they can raise enough money. To assist in the calculations, assume the tuition at both universities will increase at an annual rate of five per cent. Living expenses are currently estimated at $6,000 per year at both schools. This expense is expected to grow at only three per cent per year. Further assume the Smiths can deposit their money into a growth oriented Investment fund at Dubai International Capital, which has historically earned a 12 per cent return per annum (one per cent per month). The couple wishes to have a pre-determined monthly amount automatically drafted from their checking account. When Harry starts college they will slowly liquidate the account by making an annual payment to Harry to cover tuition and living expenses at the beginning of each year for the four years he will be in college.

Answer 1

1) When Harry is ready to attend the University (13 years from today) the tuition expenses of American University is

= $20000 per year * 1.05^13 =$37712.98 per year

2) When Harry is ready to attend the University (13 years from today) the Living expenses of American University is

= $6000 per year * 1.03^13 =$8811.20 per year

3) When Harry is ready to attend the University (13 years from today) the tuition expenses of British University is

= $2500 per year * 1.05^13 =$4714.12 per year

4) When Harry is ready to attend the University (13 years from today) the Living expenses of British University is

= $6000 per year * 1.03^13 =$8811.20 per year

5) Total Expenses (Tuition + Living ) in the 4th year in American university is

= $20000*1.05^16+ $6000*1.03^16 = $53285.73

6) Total Expenses (Tuition + Living ) in the 4th year in British university is

= $2500*1.05^16+ $6000*1.03^16 = $15085.43