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What is the present value of the cost of college education for 4 children ages 1,...

What is the present value of the cost of college education for 4 children ages 1, 3, 5, and 7. The current 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 parents portfolio rate of return is 8%.

Solutions

Expert Solution

Child aged 1 year will go to college through 17 to 20 years

Similarly, other 3 children will go through, 15 to 18 years, 13 to 16 years, 11 to 14 years

Period Discounting Factor
[1/(1.08^period)]		 Inflation Adjusted College Fees
[(Previous Years Fees)*(1+0.06)]		 Number of Children
going to College		 Total Fees
[College Fees*Number of Children]		 PV of Total Fees
[Total Fees*Discounting Factor]
1 0.925925926 25000
2 0.85733882 26500
3 0.793832241 28090
4 0.735029853 29775.4
5 0.680583197 31561.924
6 0.630169627 33455.63944
7 0.583490395 35462.97781
8 0.540268885 37590.75647
9 0.500248967 39846.20186
10 0.463193488 42236.97398
11 0.428882859 44771.19241 1 44771.19241 19201.59702
12 0.397113759 47457.46396 1 47457.46396 18846.01189
13 0.367697925 50304.9118 2 100609.8236 36994.02334
14 0.340461041 53323.2065 2 106646.413 36308.94883
15 0.315241705 56522.59889 2 113045.1978 35636.56089
16 0.291890468 59913.95483 2 119827.9097 34976.62458
17 0.270268951 63508.79212 2 127017.5842 34328.90931
18 0.250249029 67319.31964 2 134638.6393 33693.18876
19 0.231712064 71358.47882 1 71358.47882 16534.62041
20 0.214548207 75639.98755 1 75639.98755 16228.42374
PV of Total Fees =
Sum of PVs		 282748.9088 = $282748.91

jeff jeffy answered 2 years ago
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