Question
Answer in Excel Suppose you are planning tuition funds for two children. The first child will begin need to make their first tuition payment in
Answer in Excel
Suppose you are planning tuition funds for two children. The first child will begin need to make their first tuition payment in 10 years from today, and the second child will need to make their first tuition payment in 14 years from today. Each child will need four annual tuition payments. Assume average tuition now is $22,000 per year and will increase at a rate of 3% each year. You will invest the fund in equities with a 10.5% expected annual return until one year before the first tuition payment for the child. One year before the first tuition payment, you will switch the fund into a money market account with an expected annual return of 2%.
Average tuition today. 22,000.00 Annual increase in tuition. 3.00% Rate of Return before college starts. 10.50%
Rate of Return after college starts 2.00%
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a) How much money will you need to have accumulated one year before each childs first tuition payment to be able to meet the total tuition requirements? (Use Excels NPV function)
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b) If you were to make a single lump sum investment today, how much would you need to invest today to meet each childs total tuition requirements?
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c) If you were to invest an equal dollar amount at the end of each year, how much would you need to invest annually to meet each childs total tuition requirements?
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d) If you were to invest an equal dollar amount annually and your first investment is today, how much would you need to invest annually to meet each childs total tuition requirements?
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e) Assume you can save $7,000 for child 1 and $5,000 for child 2 at the end of each year to invest towards their tuition requirements. What rate of return do you need to earn in pre-college years to meet each childs total tuition requirements?
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