1. Your child has just started college at a private school which currently cost $60,000 per year. He will go to college for 4 years, starting now. You expect tution to increase in cost by 5% per year over the next 3 years.
The college offers you the opportunity to pay $200,000 for all four years regardless of any tuition price increases, but you have to pay the $200,000 today. If your investments earn 9% per year, how much would you save by paying all the tuition today?
2. You own a 10-year-old car and are considering whether to buy a new car now. Your car will last three more years whereupon you will buy a new car. The new car cost $23,000 today and prices on new cars are rising 3% per year on average. Maintenance costs on the old car will average $1000 more than the new car for 3 years starting next year. Your savings account earns 4% compounded annually.
If you buy the car now, how much do you save in present value terms vs. waiting to buy the car?
State your answer to the nearest dollar.
3. You’ve sold a product to an industrial customer for $127842. You normally allow your industrial customers 7 months to pay-off their account. The customer asks for a discount on the price if it pays immediately. If your bank account pays 4.1% APR, compounded monthly, what price should you offer the customer if it pays today?
Give your answer to the nearest dollar.