Question

John is looking at several options to fund his son’s 4-year university degree. The university fees of $45,000 a year will have be paid starting 11 years from today. He is analysing an insurance plan that pays out $45,000 a year for 4 years with the first payout 11 years from today. The insurance plan has several payment options:

Option 1 Pay $60,000 today.
Option 2 Beginning 1 year from today, pay $12,000 a year for the next 8 years.
Option 3 Beginning 1 year from today, make payments each year for the next 8 years. The first payment is $11,000 and the amount increases by 5% each year.

Can I have the cash flow time line for these 3 options with regards to calculating present value.

Answer 1

There is no discounting rate given for discounting cash flows for calculate Present Value. So we assume it 12% and 10% ( no criteria simply can choose any rate.). Calculate on two different discounting rates.

Time lines for different options :

If we assume 12% discounting rate - option 2 is best option.

If we assume 10% discounting rate - option 1 is best option.