Question

Mr. and Mrs. Ahmad owns a villa in Dubai. Mr. Ahmad is partner in a Pharmaceutical Company. Mrs. Ahmad stays home with their child, Abdullah, who is age five. Until recently, the Ahmad’s have felt very comfortable with their financial position. After visiting their family financial planner, the couple became concerned that they were spending too much and not putting enough funds aside for both their child's future education needs and their own retirement. Mr. Ahmad earns $95,000 per year, but with the rising costs of education, their past contribution efforts have left them short of their financial goals. To estimate the amount of money Ahmad’s need to begin putting away for future security, some general information was obtained by their financial planner. The couple felt that the amount of money they currently contribute to their saving account would be sufficient for their retirement needs. What they had not accounted for was Abdullah's education. Mr. Ahmad is a graduate of American University Dubai, a private university with an extremely high tuition fee of approximately $20,000 per year. Mrs. Ahmad graduated from the British University Dubai. The tuition expense there is only $2,500 per year. When Abdullah turns 18, the couple wishes to send him to either of these exceptional universities. They have a slight preference for the American University. The problem, however, is that with the rate at which tuition fee is increasing Ahmad is not sure they can raise enough money. To assist in the calculations, assume the tuition at both universities will increase at an annual rate of five per cent. Living expenses are currently estimated at $4,000 per year at both schools. This expense is expected to grow at only three per cent per year. Further assume Ahmad can deposit their money into a growth oriented Investment fund at Dubai International Capital, which has historically earned a 12 per cent return per annum (one per cent per month). The couple wishes to have a pre-determined monthly amount automatically drafted from their checking account. When Abdullah starts college they will slowly liquidate the account by making an annual payment to Abdullah to cover tuition and living expenses at the beginning of each year for the four years he will be in college.

Questions:

1. How much will the tuition and living expenses be per year when Abdullah is ready to attend the University? Give an answer for each University.

2. Once Abdullah starts college what will his total expenses be in each of his four years? Again, give an answer for each University.

3. How much money will Mr. & Mrs. Ahmad have to deposit per month to allow Abdullah to attend American University? How much money will have to be deposited per month to allow Abdullah to attend the British University? (HINT: To answer this question you need to consider the costs of ALL four years.)

4. What is the relationship between the amount that must be deposited monthly by the parents and the future increases in both tuition and living expenses?

Answer 1

Question 1
Abdullah age is 5 years presently there are 13 years for him to turn 18
University	American University Tuition Fee	British University Tuition Fee	Living Expenses
Per Year($)	20000	2500	4000
Growth Rate	5%	5%	3%
Per year Expense after 13 Years	37,713	4,714	5,874
Formula for calculating Future tuition or living expenses is present expense * (1+ Growth Rate)^(No of Years)
Tuition & Living Expense when Abdullah ready to attend university
Expense	American University	British University
Tuition Fee	37,713	4,714
Living Expense	5,874	5,874
Total	43,587	10,588
Question 2
Year	American University	British University
1	43,587	10,588
2	45,649	11,000
3	47,810	11,429
4	50,076	11,876