Brutal TVM question...

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beingthatguy

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A couple plans to pay for the child tuition for 4 years starting 18 years from now. The current cost of college is 7,000 and they expect this to rise at 5% a year. They assume they can earn 6% annually. How much must be put aside starrting next year if they plan to make 17 equal payments?

I got half way through it....but the end confuses me.

Let me know what you think
 
Ugh, I remember this one. I gave up.

I'm betting the CFA will not insert one the Saturday exam.
 
flobeebhead, thats right but if you did the math out, why cant you just sum up all the payments for the college education (after adjusting for 5% increase) and solve for PV using the 6% discount rate?

Yr 18 - 16846.33
yr 19 - 17688.65
yr 20 - 18573.08
yr 21 - 19501.74

Why can you sum all and discount @ 6 % to find PV? Why do they do each one seperate?
 
yah I know, but why do they discount each individually and not a lump sum? thats the only part I have trouble with...
 
If I understand your question correctly, since the price of tuition continues to increase even while she is attending college and you're paying for it, you must take that into consideration and can't use a lump sum.

I figured these 4 totals as FV's and then got the PMT for each:

Yr 18 - 16846.33
yr 19 - 17688.65
yr 20 - 18573.08
yr 21 - 19501.74

When you figure the PMT for the Yr 18 amount, I believe you need to use N=17 instead of N=18.



Edited 1 time(s). Last edit at Sunday, November 30, 2008 at 05:03PM by BrokenSocialScene.
 
Even at N=17

N=4
PMT - 0
FV = 72610
PV - Compute
I = 6

PV = 57,513.92

Book says 62,677 at N = 17?
 
n = 17
pmt = ?
pv = 0
i = 6
fv = 16,846

pmt = 597.12

next one:

n = 18
pmt = ?
pv = 0
i = 6
fv = 17,688.65

pmt = 572.34

I did that for all 4 then added all payments. Maybe there's an easier way....
 
beingthatguy Wrote:
-------------------------------------------------------
> flobeebhead, thats right but if you did the math
> out, why cant you just sum up all the payments for
> the college education (after adjusting for 5%
> increase) and solve for PV using the 6% discount
> rate?
>
> Yr 18 - 16846.33
> yr 19 - 17688.65
> yr 20 - 18573.08
> yr 21 - 19501.74
>
> Why can you sum all and discount @ 6 % to find PV?
> Why do they do each one seperate?


Hi Broken,

you need to do each one separate because of the compounding of the balance that is still in the account after they make the first tuition payment. (it is still earning interest). in addition, the cost of the tuition is still going up 5% after the first payment is due. hope that helps, or i might not be understanding your question...
 
Hey guys,

i'm getting pmt = $2221.58

PV of tuition costs 18 years from now = 62 677.11 using the growing annuity formula

then FV = 62677.11
PV = 0
N=17
I/Y = 6
PMT = 2221.58

are the discrepencies in the answers due to rounding?
 
I kept getting 2221 yesterday as well and couldnt figure out where i was going wrong...
 
puf...I got it...2224.9 but took long time and got confused at whether 62,670 was at 18 or 17pd. Realized that end-mode would bring that amt to 17th pd.

Then again not sure if the payments would end at 16 or 17... however, used 17 and got the answer.
 
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