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EDUCATION FUNDING Mr. & Mrs. Smith came to you because their oldest child starts college tomorrow and they need help determining how to pay for

EDUCATION FUNDING

Mr. & Mrs. Smith came to you because their oldest child starts college tomorrow and they need help determining how to pay for it. They have not set aside any funds to pay for their children to attend college.

Mr. & Mrs Smith are both 45 years old and have been married for 22 years. They have three (3) children. Maggie, age 18, will begin college today. Matt, age 12, is in 6th grade and Bob, age 9, is in 3rd grade. They want to pay for each of their children to attend four years of college at state university beginning at age 18.

Economic Info

CPI expected to be 3% annually

Education inflation expected to be 6% annually

Prime rate 3.25%

Market expected return 8.0% which is equivalent to the Smiths required and expected rate of return

Fixed income investments yield 6.0%

The Smiths estimate that college costs at State University currently total $15,000 per child, per year in todays dollars

Their state offers a 529 College Savings Plan as well as a Prepaid Tuition Plan

1. Use the Uneven Cash Flow Approach to calculate the NPV of 4 years of education expense for all three children.

(Please show all work, thank you!)

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