Question

North West Sr. is creating a college fund for his two kids, South and J-C, ages 5 and 3, respectively. To take over the fashion Empire, they will start college at 18 years old. Today, Harford University of Fashion costs $25,000, per student, and this cost is expected to increa se by 5% each year. West Sr. plans to make 19 annual contributions to the college fund, and he plans to increase the contributions by 8% each year to combat inflation. The first contribution of $8,656.37 will be made today. The last disbursement from the college fund will be on J-C's 21st birthday. On that day, also, the last payment must be made for his last year of college. As West Sr's investor, you promised he will earn 3.7% return on his contributio ns. Using the above information, fill in the Table below. (Useful Hint: You will need to draw down on the college fund acccount to pay for tuition once the kids are in college. Moreover, look out for the years when they are both in school) Deposit Amount $8,656.37 Interest Rate 3.7% $25,000 College Cost This Year Cost Growth Rate 5.0% Contribution Growth Rate 8.0% Value of Last Contribution South's Age J-C's Age Tuition Costs Balance ear Deposits 3 6 11 10 8 12 11 15 12 3 18 16 14 15 17 20 20 17 22 , refuses to leave any money on the table so his account balance should go zero if all your calculations are correct Check Point: West 15 23 21

Answer 1

Notes

1. Investment return is calculated based on the start of the year balance amount.

2. Balance of the next year is calculated as = Balance of the last year+ Deposit at the start of current year + Investment return during the previous year - Tuition fee

3. All the costs or deposits have been increased per year at the rate advised in the question.

A B C D E F G H K L M Deposits (at Tuition Cost Tuition Cost (the start of Investment Balance (at College fee the start of Return for the South's Age J-C'S Age Year (South) per student C year) 8656.37 the year) 1 year 2 Deposit Amount 8656.37 25000.00 8656.37 320.29 26250.00 678.04 1076.71 1520.02 2012.01 2557.05 3 Interest rate 3.70% 4 6 9348.88 18325.54 1 4 College cost this year 25000 27562.50 7 5 10096.79 29100.37 2 10904.53 8 41081.62 Cost Growth Rate 59% 5 28940.63 6 6 Contribution growth rate 8% 30387.66 9 11776.90 54378.53 31907.04 33502.39 Value of last distributiion 7 34591.02 10 12719.05 69109.59 85403.21 3159.92 6 13736.57 8 11 - .. 12 10 3825.75 9 35177.51 14835.50 103398.63 10 36936.39 13 11 16022.34 123246.71 4560.13 145110.97 11 38783.21 9 14 12 17304.12 5369.11 169168.52 12 40722.37 10 15 13 18688.45 6259.24 42758.48 7237.62 8311.94 7746.32 13 11 16 14 20183.53 195611.29 14 12 17 15 44896.41 21798.21 224647.12 47141.23 16 15 13 18 47141.23 23542.07 209359.90 7142,23 49498.29 49498.29 16 14 19 25425.43 193033.37 4576,48 51973.20 17 15 20 18 51973.20 51973.20 27459.47 123688.66 18 54571.86 16 21 19 54571.86 54571.86 29656.23 48777.64 1804.77 57300.46 60165.48 936.50 19 57300.46 17 22 20 32028.73 25310,68 672.72 20 60165.48 18 23 21 34591.02