Advanced Time Value of Money Problems

Your child was just born and you are planning for his/her college education. Based on your wonderful experience in Financial Economics you decide to send your child to Hofstra University as well. You anticipate the annual tuition to be $60,000 per year for the four years of college. You plan on making equal deposits on your childs birthday every year starting today, the day of your childs birth. No deposits will be made after starting college. The first tuition payment is due in exactly 18 years from today (the day your child turns 18 no deposit required, i.e. last deposit is on 17th birthday). Assume the annual expected return on your investments is 10% over this period.

1. (i) Calculate the annual deposit.

2. (ii) Calculate the amount needed if only equal annual deposits are made on birthdays 5-10 inclusive.

3. (iii) Calculate the amount needed if two equal annual deposits are made on birthdays 5 and 13.

4. (iv) Answer part (i), now assume tuition rises 10% per year.

5. (v) Answer part (i) assuming first deposit will be made on your childs 1st birthday. All other information is the same. What is the annual tuition payment? How does it compare to part (i)? Is your answer surprising?