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Question 2 Early this morning Tom and Rose had a baby, Remy. They would like Remy to attend Rotman School of Management in Canada, so
Question 2 Early this morning Tom and Rose had a baby, Remy. They would like Remy to attend Rotman School of Management in Canada, so they plan to start a college savings plan today, in order to pay Remy's Rotman tuition. Today, Rotman tuition is $50,000 per year. Tuition costs are expected to grow by 9% per year (in nominal terms) over the foreseeable future. Remy is expected to start college 19 years from today, at which time she will have to make the first tuition payment. Tom and Rose think Remy will graduate in four years. a. What are the four tuition payments (in nominal $) that Remy will be expected to make while at Rotman? b. If Tom and Rose earn a 4% annual nominal interest rate on their college savings plan interest is earned on interest once a year), and they expect it to stay like this forever, how much money will they need to have accumulated by the time Remy starts her freshman year at Rotman? c. Overall, Tom and Rose want to make 19 constant contributions (in nominal terms) to the college savings plan. They plan to make those contributions once a year, starting today and making the last one when Remy is 18. How much will they have to contribute every year to the plan to be able to cover Remy's college expenses? d. Tom and Rose would like to retire when Remy's starts college, and, hence, by that time, they also want to have saved for retirement. Aside from the pension they expect to receive, they'd like to have an additional $40,000 per year (for the two of them together) for 20 years. How much will they have to contribute every year to the plan to be able to cover Remy's college expenses and their consumption needs? e. Suppose, instead, that they'd like to have $40,000 per year (for the 2 of them together) in real terms (as opposed to nominal), expressed in today's dollars, for those 20 years. How much will they have to contribute every year (in nominal terms) to the plan to be able to cover Remy's college expenses and their consumption needs? Assume inflation is 2%
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