Time Vlalue of Money

You are saving for the college education of two children. One child will enter college in 5 years, while the other child will enter college 2 years later in 7 years. College costs are currently $10,000 per year and are expected to grow at a rate of 2% per year. You assume that each child will be in college for four years. Therefore you eill be paying tuition for six years before both children graduate. You currently have $30,000 in your educational fund. Your plan is to contribute a fixed amount to the fund over each of the next 5 years. Your first contribution will come at the end of this year, and your final contribuition will come at the date when you make the first tuition payment for your oldest child in 5 years. You expect to invest your contribuitions into various investments, wihich are expected to earn 5% per year the same rate of interest today. How much should you contribute in each of the next 5 years in order to have enough money at year 5 which if reinvested at 5% will meet expected yearly cost of your childrens education?

1) First Calculate the expected cost or outgoing cash flow for the first children's education for each of the 6 years in the future, considering inflation will cause the cost to grow by 2% a year from today cost of $10,000

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CF CF CF CF CF CF

2) Second calculate the estimated total lump sum amount you will need to have by year five which if reinvested at 5% will pay for college in the years that follow. (Use the interest rate of 5% per annum to find the NPV of the cash flow above entering the cash flow in the year 5 as CF0 in your calculator. (I don't have financial calculator)

0----------1------------2-----------3----------4-----------5-----------6----------7-----------8--------------9------------10 Yrs

3) Third the answer to the second step gives you the total amount you will need to have by year five. You have years to save starting at time 0 - how much will you need to save in each of the next five years to reach your savings goal assuming you have $30,000 to start with and the rate of return on your savings is 5% per annum. $30,000=PV

year 5 amount is the value you get in thesecond step

0------------1-------------2------------3------------4--------------5

The annuity amount you will need to save in each year 1 thru 5 in the answer to this problem.