Question

Suppose that you just had your first baby, Oprah, and you wish to ensure that enough money will be available to pay for Oprah's college education. Tuition and other fees today add up to $12,500 per year. Tuition and other costs are expected to increase at a rate of 4 percent per year. Assuming that all of Oprah's college savings are invested in an account paying 7 percent interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

Answer 1

Calculate the amount of money Oprah need to have available at age 18 to pay for all four years of her undergraduate education

Funds Required at the beginning of the undergraduate year are as follows :

Graduation Year	PV	Inflation	Period Elapsed	FV = PV*(1+r)^n
1	$ 12,500.00	4%	18 Years	$ 25,322.71
2	$ 12,500.00	4%	19 Years	$ 26,335.61
3	$ 12,500.00	4%	20 Years	$ 27,389.04
4	$ 12,500.00	4%	21 Years	$ 28,484.60

Therefore, in the first year of graduation Oprah need $ 25322.71 , 2nd year - $26355.61, 3rd Year - $27389.04 and 4th Year $28484.60

Now to calculate the amount of money required at the age of 18th year, we must calculate the Present Value of fees required to be paid at 7% rate of return

Amount Required at the Age of 18 = PV of 1st Year Fee + PV of 2nd Year Fee + PV of 3rd Year Fee + PV of 4th Year Fee

Amount Required at the Age of 18 = $ 25,322.71 +  $ 26,335.61*PVF(7%,1Year) + $27389.04*PVF(7%,2Year) + $28484.60*PVF(7%,3Year)

Amount Required at the Age of 18 = $ 25,322.71 +  $ 26,335.61*.935 + $27389.04*.873 + $28484.60*.816

Amount Required at the Age of 18 = $ 97100.57