Question

Matt and Debra Pearson live in an upscale neighborhood in Orem, Utah. Matt is a partner in the family owned automotive painting business. Debra stays home with their son, Brady, who is four.

After visiting with their financial planner, the couple became concerned that they were spending too much and not putting enough funds aside for Brady’s future educational needs. Matt earns $95,000 per year, but with the rising costs of education, they are concerned.

Matt is an alumni of the University of California at Los Angeles (UCLA) with tuition and book expenses of approximately $17,000 per year today. Debra graduated from Utah Valley University. The expense for tuition and books there is currently estimated at about $6,700 per year. When Brady turns 18, the couple wishes to send him to one of these two exceptional universities. They have a slight preference for Utah Valley University. The problem, however, is that with the rate at which tuition is increasing the Pearson’s are not sure they can save enough money and they have decided they do not want to borrow to pay for Brady’s education.

Assume the tuition at both universities will increase at an annual rate of 5% from now until Brady finishes college. Living expenses are currently estimated at $11,000 per year at both schools. This expense is expected to grow at only 2.5% per year. Further assume that Pearson’s can deposit their money into a growth oriented mutual fund at the Salt Lake City based mutual fund company which has historically earned 9.5% per annum.

The couple wishes to save by having a pre-determined amount automatically withdrawn from their bank account at the end each month. They plan to contribute from now until Brady starts college. When Brady starts college, at the beginning of his freshman year, they will stop making contributions. They want to have enough in their account to cover all four years of college expenses when Brady starts college. Assume that the funds in the account will continue to earn a return while he is in college. They will make annual withdrawals from the account to cover both tuition and living expenses for Brady at the beginning of his freshman, sophomore, junior, and senior years. When the withdrawal for the senior year is made the account balance will be zero.

Complete an analysis and write a professional letter to the Pearson’s (who don’t understand finance) explaining the analysis you performed, why you performed it, what the results are, and your recommendations. Use the provided rubric in preparing your letter. In the letter and attached schedules provide information that discusses and answers the following questions.

What will be the tuition expense, living expense, and total expense for each of the four years that Brady will attend college? Provide the information for each University.

What amount will be needed in the account when Brady starts his freshman year if he attends UCLA? What amount if he attends UVU?

How much money will Matt and Debra have to deposit at the end of each month to allow Brady to attend UCLA? How much money will have to be deposited per month to allow Brady to attend Utah Valley University? Assume that Matt and Debra stop making deposits when Brady starts college.

The Pearson’s are concerned that given the current market situation the mutual fund will only earn 7.5% per year. If the return is only 7.5% how much will be needed in the account when Brady starts college and how much will have to be deposited per month for Brady to have sufficient funds to attend each school?

Answer 1

Working:

University of California at Los Angeles (UCLA)

Brad's age	Tution Fees (A)	Tution Fees increase @ 5% (B = A * 5%)	Living Expenses ( C)	Living Expenses increase by @ 2.50% (D = C*2.50%)	Total Expenses (A+B+C+D)	Contribution per year ( E)	Total Contribution (F)	Cumulative Return @ 9.50% (G)	Funds Available (F+G)
4	17000	850	11000	275	29125	3750	3750	356	4106
5	17850	893	11275	282	30299	3750	7500	746	8246
6	18743	937	11557	289	31525	3750	11250	1140	12390
7	19680	984	11846	296	32806	3750	15000	1533	16533
8	20664	1033	12142	304	34142	3750	18750	1927	20677
9	21697	1085	12445	311	35538	3750	22500	2321	24821
10	22782	1139	12757	319	36996	3750	26250	2714	28964
11	23921	1196	13076	327	38519	3750	30000	3108	33108
12	25117	1256	13402	335	40110	3750	33750	3501	37251
13	26373	1319	13737	343	41772	3750	37500	3895	41395
14	27691	1385	14081	352	43509	3750	41250	4289	45539
15	29076	1454	14433	361	45323	3750	45000	4682	49682
16	30530	1526	14794	370	47220	3750	48750	5076	53826
17	32056	1603	15164	379	49202	3750	52500	5470	57970
18	33659	1683	15543	389	51273	0	52500	5507	58007
19	35342	1767	15931	398	53438	0	52500	5511	58011
20	37109	1855	16330	408	55702	0	52500	5511	58011
21	38964	1948	16738	418	58069	0	52500	5511	58011

Utah Valley University (UVU)

Brad's age	Tution Fees (A)	Tution Fees increase @ 5% (B = A * 5%)	Living Expenses ( C)	Living Expenses increase by @ 2.50% (D = C*2.50%)	Total Expenses (A+B+C+D)	Contribution per year ( E)	Total Contribution (F)	Cumulative Return @ 9.50% (G)	Funds Available (F+G)
4	6700	335	11000	275	18310	2150	2150	204	2354
5	7035	352	11275	282	18944	2150	4300	428	4728
6	7387	369	11557	289	19602	2150	6450	653	7103
7	7756	388	11846	296	20286	2150	8600	879	9479
8	8144	407	12142	304	20997	2150	10750	1105	11855
9	8551	428	12445	311	21735	2150	12900	1330	14230
10	8979	449	12757	319	22503	2150	15050	1556	16606
11	9428	471	13076	327	23301	2150	17200	1782	18982
12	9899	495	13402	335	24131	2150	19350	2008	21358
13	10394	520	13737	343	24995	2150	21500	2233	23733
14	10914	546	14081	352	25892	2150	23650	2459	26109
15	11459	573	14433	361	26826	2150	25800	2685	28485
16	12032	602	14794	370	27797	2150	27950	2910	30860
17	12634	632	15164	379	28808	2150	30100	3136	33236
18	13266	663	15543	389	29860	0	30100	3157	33257
19	13929	696	15931	398	30955	0	30100	3159	33259
20	14625	731	16330	408	32094	0	30100	3160	33260
21	15357	768	16738	418	33281	0	30100	3160	33260

1)

Year	UCLA	UVU
Tution Fee	Living Expense	Total Expense	Tution Fee	Living Expense	Total Expense
1	33659	15543	49202	13266	15543	28808
2	35342	15931	51273	13929	15931	29860
3	37109	16330	53438	14625	16330	30955
4	38964	16738	55702	15357	16738	32094

1) As per above working, we can derive at below summary for four year total expenses at both universities:

2) $55702 is needed in account if Brady attends UCLA and $ 32094 is needed in account if Brady attends UVU.

3) If Brady attends UCLA, then Matt and Debra have to deposit $3750 per month. If Brady attends UVU, then Matt and Debra have to deposit $2150 per month.

4) If mutual fund return is 7.50%, then they have to deposit $3835 in case of UCLA and $2200 in case of UVU. Please refer below working for same:

Brad's age	UCLA	UVU
Contribution per year ( E)	Total Contribution (F)	Cumulative Return @ 7.50% (G)	Funds Available (F+G)	Contribution per year ( E)	Total Contribution (F)	Cumulative Return @ 7.50% (G)	Funds Available (F+G)
4	3835	3835	288	4123	2200	2150	161	2311
5	3835	7670	597	8267	2200	4350	338	4688
6	3835	11505	908	12413	2200	6550	517	7067
7	3835	15340	1219	16559	2200	8750	695	9445
8	3835	19175	1530	20705	2200	10950	873	11823
9	3835	23010	1840	24850	2200	13150	1052	14202
10	3835	26845	2151	28996	2200	15350	1230	16580
11	3835	30680	2462	33142	2200	17550	1409	18959
12	3835	34515	2773	37288	2200	19750	1587	21337
13	3835	38350	3084	41434	2200	21950	1765	23715
14	3835	42185	3395	45580	2200	24150	1944	26094
15	3835	46020	3706	49726	2200	26350	2122	28472
16	3835	49855	4017	53872	2200	28550	2300	30850
17	3835	53690	4328	58018	2200	30750	2479	33229
18	0	53690	4351	58041	0	30750	2492	33242
19	0	53690	4353	58043	0	30750	2493	33243
20	0	53690	4353	58043	0	30750	2493	33243
21	0	53690	4353	58043	0	30750	2493	33243