Your parents have accumulated a $170,000 nest egg. They have been planning to us
ID: 2613576 • Letter: Y
Question
Your parents have accumulated a $170,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $20,000 to help her get started, and they have decided to take year-end vacations costing $8,000 per year for the next four years. Use 8 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
How much money will your parents have at the end of four years to help you with graduate school, which you will start then? (Round your final answer to 2 decimal places.)
You plan to work on a master’s and perhaps a PhD. If graduate school costs $23,540 per year, approximately how long will you be able to stay in school based on these funds? (Round your final answer to 2 decimal places.)
Your parents have accumulated a $170,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $20,000 to help her get started, and they have decided to take year-end vacations costing $8,000 per year for the next four years. Use 8 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
At 8% interest rate the year corresponding to the factor is 11 years approx.
So number of years the fund will suffice is 11 years approx
Ans a Year 0 1 2 3 4 Compounding rate @8% 1.08 1.08 1.08 1.08 Parent's accumulation $ 170,000 Payment to Courtney 20,000 Remaining 150,000 Amount after 1 year 162,000.00 Less vacation cost 8,000 Amount remaining after 1 year 154,000 Amount after 2 years 166,320 Less vacation cost 8,000 Amount remaining after 2 years 158,320 Amount after 3 years 170,986 Less vacation cost 8000 Amount remaining after 3 years 162,986 Amount after 4 years 176,024 Less vacation cost 8000 Amount remaining after 4 years 168,024 Funds available for graduate school after 4 year =$168,024 Ans b. PV of $23540 required for n no of years will be equal to $168024 The present value interest factor is =168024/23540 =7.137At 8% interest rate the year corresponding to the factor is 11 years approx.
So number of years the fund will suffice is 11 years approx
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