Question

Let's say that when your clients' child starts college, you estimate that annual tuition will be about $15,000 in future dollars. How much in total will your clients need to have saved when their child starts college? Assume the following: • College expenses inflate at 3.5% per year • Your clients can earn an annual rate of return of 4.8% on their investments while their child is in college • Your clients want to help their child with 6 years of college • Tuition is due in full at the beginning of each year of college

Answer 1

Answer:

$87.254.70]

Working:

Required present value of tuition fees for 6 years at start of college:

Fees are due at the beginning of the year.

Year 1 fees:

Amount = $15,000

PV = $15,000

Year 2 fees:

Amount = $15,000 * (1 + 3.5%)

PV = $15,000 * (1 + 3.5%) / (1 + 4.8%)

Year 3 fees:

Amount = $15,000 * (1 + 3.5%)^2

PV = $15,000 * (1 + 3.5%)^2 / (1 + 4.8%)^2

Year 4 fees:

Amount = $15,000 * (1 + 3.5%)^3

PV = $15,000 * (1 + 3.5%)^3 / (1 + 4.8%)^3

Year 5 fees:

Amount = $15,000 * (1 + 3.5%)^4

PV = $15,000 * (1 + 3.5%)^4 / (1 + 4.8%)^4

Year 6 fees:

Amount = $15,000 * (1 + 3.5%)^5

PV = $15,000 * (1 + 3.5%)^5 / (1 + 4.8%)^5

Sum of PVs = 15000 +15000 * (1 + 3.5%) / (1 + 4.8%) +15000 * (1 + 3.5%)^2 / (1 + 4.8%)^2 + 15000 * (1 + 3.5%)^3 / (1 + 4.8%)^3 + 15000 * (1 + 3.5%) ^4/ (1 + 4.8%)^4 + 15000 * (1 + 3.5%)^5 / (1 + 4.8%)^5

= $87,254.70

Amount client need to have saved at the start of college = $87,254.70