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Joe has two children, Sydney age 5 and William age 2, which he wants to provide for their education funding.  Currently, tuition is $10,000 per year and tuition inflation is it 6%.  Joe anticipates earning 10% on his investments and he anticipates the children to start college at age 18 and go to college for 4 years. Joe wants his last savings payment to be made when the oldest child starts college.  How much should Joe save at the end of each year?

Step 1: Determine the NPV at time period zero of cash flows. Recall that this step determines the amount that could be deposited today, to satisfy the education funding need.

Step 2: Determine annual savings needed to meet the education goal. Note: Throughout this step it is significant to determine two criteria:

(1) How long does the client intend to save?

(2) When will the savings payment be made? In this problem, Joe’s oldest child is 5 and he aims to save till she starts college, which is in 13 years. He also indicates that he desires to “save at the end of each year” which indicates that this is an ordinary annuity problem.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91576

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