The Saeed family is worried about their ability to pay fee for their daughter Ni

Question

The Saeed family is worried about their ability to pay fee for their daughter Nimra. Tuition
rates are currently Rs-9,500 per semester at the QAU and have been increasing at a
rate of 5% per semester. Nimra will begin college in 5 years. The Saeed have Rs-9,500
set aside now in a college plan that will earn 6% per year. They recently heard about a
plan to pre-pay tuition at current rates, that is pay Rs-9,500 per year of QAU. Should
they pre-pay Nimra’s first semester now or keep the money invested and pay the tuition
5 years from now? How much are they saving in FV terms with this decision?

Explanation / Answer

Option 1, pay fee for first semester now $9500

First semester tution fee after five years

$9500, at 5% increase per year

9500(1+0.05)5 =   $12124.67

Option 2, pay fee later and invest first semester fee now at 6%

Future value for $9500, = PV(1+r) n

9500(1+0.06)5 = $12713.14

Saeed will receive $12713.14 after 5 years.

Saeed will save $588.46 by investing now.

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