Your oldest daughter is about to start kindergarten at a private school. Tuition is $10, 000...

Your oldest daughter is about to start kindergarten at a private school. Tuition is $10, 000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 5% per year over the 13 years of her schooling. What is the present value of the tuition payments if the interest rate is 5% per year? How much would you need to have in the bank now to fund all 13 years of tuition?

Solutions

Expert Solution

Interest Rate and Inflation Rate are EQUAL. Therefore, THEY WILL ELIMINATE THE EFFECT OF EACH OTHER. In other words, Interest earned will be equal to additional tuition fees due to increase in fees.

Therefore, Amount to be kept in account = Total Tuition Fees in today's terms(without considering effect of increase in fees) = Current Fees per year*Number of years = 10000*13 = $130000

jeff jeffy answered 2 years ago

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