Question

Asked Mar 24, 2019

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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 ?

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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