Your oldest daughter is about to start kindergarten in a private school. Tuition is $10,000 per​ year, payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 5% per year over the 13 years of her schooling. What is the present value of your tuition payments if the interest rate is 5% per​ year? How much would you need to have in the bank now to fund all 13 years of​ tuition? The present value is ?

Question
Asked Mar 24, 2019
254 views

Your oldest daughter is about to start kindergarten in a private school. Tuition is $10,000 per​ year, payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 5% per year over the 13 years of her schooling. What is the present value of your tuition payments if the interest rate is 5% per​ year? How much would you need to have in the bank now to fund all 13 years of​ tuition? The present value is ?

check_circle

Expert Answer

Step 1

Calculation of Present Value:

There are 2 issues with the annuity. The one with the current tuition fees of $10,000 and the other is a 12 year annuity period with the first payment of $10,500. Hence the growth annuity formula cannot be used because the interest rate is equal to the growth rate. So the present value of growing annuity is calculated using a excel spreadsheet which is shown below:

fullscreen
Step 2

The excel spreadsheet workings are shown below:

fullscreen
Step 3

Now calculate the Present Value:

...
fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Related Finance Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: Digital Organics (DO) has the opportunity to invest $1.06 million now (t = 0) and expects after-tax ...

A: Calculation of Total PV of Interest Tax Shield:Excel Spreadsheet:

question_answer

Q: Please address legislation passed that increased protection for homeowners from foreclosure or at le...

A: Foreclosure is a legal process where a lender or a creditor or mortgage holder can recover or sell t...

question_answer

Q: (#11) Genoa Company is considering a new investment whose data are shown below. The equipment would ...

A: Approach:We will first estimate the initial investment, i.e cash flow at t = 0We will then plot the ...

question_answer

Q: An individual wishes to borrow $10,000 for a year and is offered the following alternatives: a. A 10...

A: Calculating the effective interest rate on borrowing option 10% loan discounted in advances. We have...

question_answer

Q: Suppose a family has a gross annual income of $43,200.   a. What is the maximum amount the family sh...

A: Most financial advisors recommend that one limit his mortagage payment to 28% of the monthly income ...

question_answer

Q: Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 3.80 percent that s...

A: Calculation of the cost of preferred stock of the company. We have,Cost of preferred stock = Annual ...

question_answer

Q: Suppose a security follows a geometric Brownian motion with interest rate r=0.01, volatility paramet...

A: The formula I have for simlating the prices have mu and sigma, but no r (Interest rate). Please repo...

question_answer

Q: Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 315,00...

A: Calculating the price per share of equity of the company. We have,Let the price of equity share be X...

question_answer

Q: Use the compound interest formula A = P(1 + i)n to find the indicated values A = $6,000; i = 0.03; n...

A: Compounded Interest:           It is the method for computing interest at the initial amount of prin...