John and Jackie have 2 children ages 3 and 5. The current annual cost of college...

John and Jackie have 2 children ages 3 and 5. The current annual cost of college is $25,000. The children will begin college at age 18 and be in college for 4 years. Education inflation is expected to be 6% and the parent’s portfolio rate of return is 10%. What would be the lump sum amount the parents need to set aside today to invest for their children’s education?

$97,256
$112,812
$149,752
$149,961

Expert Solution

for the child aged 3 years, it will start its college when it turns 18 , or 15 years from now. Its 2nd year at college is 16 years from now, 3rd year- 17 years from now and 4th year 18 years from now.

for the child aged 5 years, it will start its college when it turns 18 , or 13 years from now. its 2nd year at college is 14 years from now, 3rd year- 15 years from now and 4th year 16 years from now.

we need to adjust for the inflation- and project how much the college fee will be in each of the above years

FV = PV X (1+r )ⁿ here r is the inflation rate

This gives the college fee to be incurred in future. But we need the amount to be set aside today. It will be the PV of these amounts

PV = FV / (1+r)ⁿ here r is the rate of return on investment

accordingly,

excel formulas

.

jeff jeffy answered 2 years ago

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