# 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 ?

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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 ?

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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:

Step 2

The excel spreadsheet workings are shown below:

Step 3

Now calculate the Present Value:

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