(19) The parents of a newborn daughter would like to set aside an amount today t

Question

(19) The parents of a newborn daughter would like to set aside an amount today to cover what they expect will be the total cost of four years of college education The parents estimate that the first year of tuition, fees, and living expenses will be S60,000 and will be due to the college on her 18h birthday exactly 18 years from today. The parents estimate that the following three payments, due on her 19th, 20th and 21st birthdays, will also be S60,000. What dollar amount would need to be set aside today to cover all four years of college education for the newborn? Use an interest rate of 5% A. S57,907 B. S62,222 C. $69,090 D. S92,825 E. $134,934

Explanation / Answer

Present value of 21st year cash flow at year 18 = 60000 / ( 1 + 0.05)3 = 51,830.2559

Present value of 20th year cash flow at year 18 = 60000 / ( 1 + 0.05)2 = 54,421.7687

Present value of 19th year cash flow at year 18 = 60000 / ( 1 + 0.05)1 = 57,142.8571

Total value at year 18 = 51,830.2559 + 54,421.7687 + 57,142.8571 + 60,000 = 223,394.8817

Present value = 223,394.8817 / ( 1 + 0.05)18

Present value = 223,394.8817 / 2.406619

Present value = $92,825

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