A couple plans to pay their child’s college tuition for 4 years starting 18 years from now. The current annual cost of college is C$7,000, and they expect this cost to rise at an annual rate of 5 percent. In their planning, they assume that they can earn 6 percent annually. How much must they put aside each year, starting next year, if they plan to make 17 equal payments?
Share
Hello! Can you share the options ?
The correct answer is C$2,221.58
I am also trying to solve this. Which book is this question from? Can you please share so that I can see the solution.?
Here I attached the solution.
Now I’m explaining here.
The current cost is 7000 which is expected to rise by 5%. They will start the payment for 4yrs starting from 18th year.
So here we will find the FV of 7000 for year 18,19,20 nd 21 at rate 5%.
Now to equate the four year college payment at 17th year find PV(I did it by using cash flow, u can see that from the attachment)
Dn simply find for pmt this will give you how much u will keep aside each year for 17 years.
How to do it via TVM mode?
Instead of using cash flow, we can calculate by using TVM mode also.
Dn u need to calculate each year for 18,19,20 nd 21 separately.
Think year 18 as year 1 for paying of college fees. So treat it as N=1
Similarly for 19,20,21 N=2,3,4 respectively.
Now find the FV for year 18 at 5% rate.
So 7000(1+5%) ^18=16,846.33
Similarly for other 3 years.
Dn we will need to find PV for each 4 year separately nd dn we will add it.
For 18th year
Think it as year 1.
So FV=16,846.33
N=1
I/Y=6
CPT PV=-15,892.76
Similarly for other 3 years.
Dn add all PV.
Take that amt nd find pmt dn.
Other part of the sum is same as I solved in that attachment.
It’s just u can directly find NPV using cash flow form which will become little bit easy. Otherwise you can find PV separately for 4years.
Can’t we do PMT=7000 in BGN mode
I/Y= 5
N= CPT PV
Now END mode
and then Put PV as FV
I/Y= 6
N=17
CPT PMT
Is ans coming this way?
Exactly right.
Rcl1 15892.79
Rcl2 15742.86
Rcl3 15594.34
Rcl4 15447.23
Total 62677.22 -FV
6 I/Y
N 17
Cpt Pmt 2221.58.
Thanks!
I guess I misinterpreted the question or something.
Thank you!!