Tom and Mary James just had a baby. They heard that the cost of providing a coll
ID: 2735047 • Letter: T
Question
Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average of 10 percent per year. Tom and Mary want to make sure their son has $100,000 for college. Consider each of the following questions.
How much does Tom have to invest in this mutual fund at the end of each year to have $100,000 in 18 years?
If the bonus is not paid until the first of the year, how much does Tom have to invest at the beginning of each year to have $100,000 in 18 years?
Tom’s father said he would provide for his grandson’s education. He will put $10,000 in a government bond that pays 7 percent interest. His dad said this should be enough. Do you agree?
If Mary has a savings account worth $50,000, how much will she have to withdraw from savings and set aside in this mutual fund to have the $100,000 for her son’s education in 18 years?
If Mary has been advised to keep the $50,000 in her savings account earning 4 percent compounded monthly, how much additional money will she have to set aside in the stock mutual fund to have the $100,000 for her son’s education in 18 years?
Explanation / Answer
Tom have to invest in this mutual fund at the end of each year = $2,193.02 [ use financial calculator]
Tom have to invest at the beginning of each year = $1,993.66 [use financial calculator]
Future value of Tom’s father contribution = $10,000 (1 + 0.07)18 = $33,800. As the future value of amount contributed by Tom's father is less than $100,000 therefore i do not agree with the intention of Tom's father.
The Amount Mary have to withdraw from savings and set aside in this mutual fund = $100,000/(1 + 0.10)18 = $17,985.87.
Amount in saving account after 18 years = $50,000 (1 + 0.04/12)18x12 = $102,525
Therefore no additional amount of money is required to set aside in the mutual fund.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.