3. An industrial engineer planning for her son’s college education made deposits

Question

3. An industrial engineer planning for her son’s college education made deposits into a separate brokerage account every time she earned extra money from side consulting jobs at NPMG. The amounts and timing of the deposits are as follows: EOY1 $5,000; EOY2 $8,000; EOY3 $9,000; EOY4 $9,000; EOY7 $15,000; EOY11 $16,000; EOY17 $20,000. If the account increased at a market rate of 15% per year and inflation averaged 3% per year over the deposit period, determine the value of the college education account at the end of year 17 in today’s dollars.

Explanation / Answer

To compute Future value of college education in today's dollars, we use Real interest rate as the relevant interest rate.

Real interest rate = Market rate - Inflation rate = 15% - 3% = 12%

FV after 17 years ($) = 5,000 x FVIF(12%, 16) + 8,000 x FVIF(12%, 15) + 9,000 x FVIF(12%, 14) + 9,000 x FVIF(12%, 13) + 15,000 x FVIF(12%, 10) + 16,000 x FVIF(12%, 6) + 20,000

= 5,000 x 6.1304** + 8,000 x 5.4736** + 9,000 x 4.8871** + 9,000 x 4.3635** + 15,000 x 3.1058** + 16,000 x 1.9738** + 20,000

= 30,652 + 43,788.8 + 43,983.9 + 39,271.5 + 46,587 + 31,580.8 + 20,000

= 255,864

**From FVIF Factor table

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