Part One

1. [Time Value of Money] David, aged 30, wishes to accumulate a college fund for his newborn baby (age 0). Assuming that his baby will need 20,000 each year for four years starting the beginning of his age 18 for college, how much money he needs to put aside right now? If David does not have that amount of money right now, but he can save certain amount of money at the end of each year, how much money each year he needs to save in order to have enough for his sons college? The annual interest rate is 4%.

Part Two

2. [Time Value of Money] Assume David (from question 1) can invest in a high return fund with expected return 10% each year. Compared to the safe return of 4% in question 2, how much money each year he needs to save now with the high return? (Bonus 5 points): Do you think David should go with the high return option? Why and why not?